ECO313

BUSINESS ECONOMICS

By
Dr. Md Abusaad
Learning
Outcomes
After this lecture , you will be able to
✓ Understand the basics of Supply

✓ Analyze the determinants of Supply

✓ Analyze the Law of Supply

 Supply

• Supply refers to the quantities of a commodity that

the seller is willing and able to provide at a price,
at a given point of time.
 Determinants of Supply

• Supply= f(Px, C, T, G, N)

Where,

Px: Price of the Product

C: Cost of Production

T: State of Technology

G: Government policy regarding taxes

N: Number of firms
 Determinants of Supply S1

Price of the Product

• Supply is positively related to the price of the product.
•S∝P
Price

Quantity
 Determinants of Supply S2

Cost of Production

• There is an inverse relationship between cost of

production and supply.

• If the cost increases, then the supply of the product

will get reduced.
 Determinants of Supply S3

State of Technology

• There is a positive relationship between the state

of technology and supply.

• Any improvement in technology will reduce the

cost and the supply will get improved.
 Determinants of Supply S3

Firms Expectations

• There is a negative relationship between the future

expectation of price and supply.

• For example, if firms expect the price of a commodity

to rise in the future, they may put some of their current
stock into storage and supply less to the market today.
 Determinants of Supply S4

Government Policies

• This is a macroeconomic component which has a

direct bearing on the supply of a product.

• The government policy regarding taxation may lead

to increase or decrease in the cost of production and
accordingly the supply gets influenced.
 Determinants of Supply S5

Number of Firms

• The stage of competition in the market will

determine the supply of the product in the market.

• If there is perfect competition or unrestricted entry

of suppliers in the market, the supply will be huge.

• In case of monopoly, the supply will be limited.

 Determinants of Supply S5

Natural/Social Factors

• There are often many natural or social factors that

affect supply. These include such things as the
weather affecting crops, natural disasters, pestilence
and disease, changing attitudes and social
expectations.
 Individual Supply and Market Supply

Individual Supply Market Supply

• The quantity of a commodity • The quantity of a commodity
a seller is willing and able to that all sellers are willing and
sell at every possible price able to sell at every possible
during a specific time period price during a specific time
is known as Individual period is known as Market
Supply. Supply.
 Supply Schedule and Supply Curve

Supply Schedule Supply Curve

• A table that shows the • A graphical representation

relationship between the of relationship between
price of a good and the the price of a good and the
quantity supplied. quantity supplied.
 Law of Supply

• The law of supply states that other things

remaining the same (ceteris paribus) the quantity
supplied of a good falls when the price of the good
decreases, and when the price increases, the
quantity supplied rises.

• There is a direct relationship between price and

quantity supplied.
 Law of Supply

Y
D
Price

P2
P0
P1

D
O X
Q1 Q0 Q2
Quantity
 Exceptions of Law of supply

• Closure or change in business

• Agricultural products
• Monopoly
• Competition
• Perishable goods
• Rare goods
• Out of fashion goods
 Changes in Supply Curve

• The Supply Curve may change under two circumstances.

Change in factors
Change in Price other than price of
the product
Change in Supply due to Change in Price

• A change in price leads to a movement along the

supply curve and is referred to as a change in
quantity supplied.
• A movement along the supply curve occurs when
there is a change in price.
Change in Supply due to Change in Price

Y
D
Price

P2
P0
P1

D
O X
Q1 Q0 Q2
Quantity
 Shift in the Supply Curve

• A shift in the supply curve is caused by a factor

affecting supply other than a change in price. The
shift in the supply curve is referred to as an
increase or decrease in supply.
 Shift in the Supply Curve

S1
S

S2
Price

E1 E
E2

S1

S
S2

Quantity
That’s all for now…