2,3 SUPPLY

Sellers are suppliers of goods and services in a product market

The supply of an individual firm indicates
 various quantities of a good or service a firm is WILLING and ABLE to PRODUCE & SUPPLY to the
market for sale
 at different possible prices during a particular period
 CETERIS PARIBUS (all things other than price are assumed to be constant and unchanging)

SUPPLY SCHEDULE
 Used to represent as a table, the quantities of a good, a firm is willing and able to produce and
supply AT VARIOUS PRICES
 This when plotted as a graph with Price on Y axis and Quantity on X axis gives the SUPPLY CURVE
of the firm
 Supply curve only gives information on the quantity a firm is willing / able to supply at a given
price and not the actual quantity supplied

LAW OF SUPPLY
 According to the law of supply, there is a positive relationship between the price of a good and
its quantity supplied
 over a particular period of time CETERIS PARIBUS
 As the price of good increases, the quantity supplied ALSO INCREASES , As the price falls,
quantity supplied ALSO DECREASES ceteris paribus.

 an increase in the price of tuna fish

from P1 to P2 creates an incentive for
firms to spend more time and effort to
catch or farm tuna fish.
 Hence, the supply of tuna increases
from Q1 to Q2 tonnes.
 Positive relationship between price and
qty supplied.
 Movement ALONG the curve indicates
CHANGE IN QTY SUPPLIED due to
change in PRICE

MARKET SUPPLY – Sum total of all the individual firms’ supplies for a good
 VERTICAL SUPPLY CURVE
Under special circumstances, the supply curve is vertical indicating that
 Even as price increases, quantity supplied cannot increase. It remains a constant
 The quantity supplied is INDEPENDENT of the price
2 Reasons why this can occur:
 There is a fixed quantity of the quantity supplied as there is no time to produce more. Eg.
Quantity of tickets in a theatre as there is a fixed number of seats and seats cannot be increased
in a short time
 There is a fixed quantity of the quantity supplied as there is no possibility of producing more.
 E.g. original antiques, original paintings and sculptures. Possible to make reproductions but no
more of the original can be produced

NON-PRICE DETERMINANTS OF SUPPLY

 These are variables OTHER THAN PRICE that can influence supply. These non price
determinants are assumed to be constant when Ceteris Paribus is used.
 These determinants cause a SHIFT in the demand curve

CHANGE IN QUANTITY SUPPLIED CHANGE IN SUPPLY

Movement ALONG the Supply curve
Caused by Change in Price - Whenever there is a
price change ceteris paribus, it leads to change in
qty supplied
Incease in price –increase in quantity supplied
SHIFT in the entire demand curve
Caused by change in NON-PRICE determinants
Increase in supply for a given price shifts supply curve to
the right.
Decrease in supply at a price shifts it to the left
 NON-PRICE DETERMINANTS OF SUPPLY
Cost of factors of The firm buys various factors of production – Factor price increases – cost of
production – Land, Labour, capital, entrepreneurship that it production increases – firm
resource prices used to produce the product. These determine produces less
SUPPLY VARIES the cost of production Supply curve shifts to left
INVERSELY WITH
cost of production
Technology A new improved technology reduces cost of Supply curve shifts to the right
production – production becomes more
profitable – firm produces more
Price of related Competitive supply f two or more products refers E.g. farmer who can grow both
goods – Competitive to the products produced by the same firm. wheat and corn decides to grow
supply Goods compete for using the same resources. wheat. If price of corn increases, he
Producing one more means producing less of will shift to producing corn and
another. supply curve for wheat shifts to left

Price of related Joint supply of two or more goods refers t the
goods – Joint production of goods that are DERIVED from A
supply SNGLE PRODUCT. It is not possible to produce
more of one without producing more of the
other
Butter and skimmed milk produced
from whole milk
Petrol and diesel from crude oil

Producer price If firm expects pice of product to increase in

expectations the near future, they will withhold some of the
quantity to sell later when price increases. So
supply decreases
taxes Imposition of new tax or increasing tax
increases cost of production. So supply
 decreases.
Subsidies A subsidy is a payment made to the firm by
the Government to encourage an increase in
the production of good produced,
This causes fall in production cost. So supply
increases
Number of firms Increase in firms means increase in supply
Shocks / sudden Weather conditions for agricultural products
events Oilspill caused decrease in supply of seafood
a) Number of firms producing A
increases
Supply increases
Shift to right
Firms expect the price of Product A
will fall in the future
Supply increases
Government grants a subsidy on
each unit of A produced
Production cost decreases
Supply increases
A new technology is adopted by
firms producing A
Supply increases
b) The price of a key input in the
product of Product A increases
Production cost increases
Supply decreases
Price of B falls and B is in
competitive supply of A
Price of B falls means quantity
supplied of B falls,
Then supply of A increases
Supply curve shifts to the right
Price of Product B increases and B is
in joint supply with A
Price of Product B increases.
So quantity supplied of B increases.
So supply of B increases