Lecture Notes: Business Economics Theory of Supply

SUPPLY

Supply exists when certain conditions are fulfilled or when firm has:

1. Resources and Technology to produce it

2. Can profit by producing it
3. Has definite plan to sell it

LAW OF SUPPLY

Ceteris Peribus or Other things remain unchanged

If price of a commodity increases, quantity supplied for that particular commodity also
increases.

Supply Schedule
Quantity Supply Curve
Price
Points Supplied 8
(P) (Q s )
6
A 7 700
B 6 600 4
C 5 500
2
D 4 400
F 3 300 0
G 2 200 0 200 400 600 800
H 1 100

Price Cost Profit = Price - Cost

5 5 0
6 5 1
7 5 2

Schedule and graph explains as price increases quantity supplied increases.

Supply Curve OR Minimum Supply Price Curve

ASSUMPTIONS

Cost will remain unchanged

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Lecture Notes: Business Economics Theory of Supply

QUANTITY SUPPLIED (Q s )

Quantity supplied is the amount that a producer plans to sell at a particular price during a
particular period of time.

Quantity Supplied is shown by a point on supply curve.

SUPPY (S)

Supply shows selling plan of a producer or Supply shows complete relationship between price
and quantity supplied.

Supply is shown by entire supply curve.

CHANGE IN QUANTITY SUPPLIED

According to the law of supply, price is the only factor that changes quantity supplied. Quantity
supplied changes in two ways:

1. Expansion in Supply
2. Contraction in Supply

Expansion in Supply

According to the law of supply, when price of a commodity increases, quantity supplied of that
particular commodity increases Keeping all other variable constant then this increase in
quantity supplied is termed as EXPANSION OF SUPPLY

Supply Schedule
Quantity
Price
Points Supplied
(P) (Q s )
A 1 10
B 2 20
C 3 30
D 4 40
F 5 50

Both Schedule and Graph shows that as we move from point “A” to point “F”, Price increases
and Quantity supplied also increases indicating that the supply expanded.
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Lecture Notes: Business Economics Theory of Supply

Contraction of Supply

According to the law of supply, when price of commodity decreases, quantity supplied of that
particular commodity also decreases keeping all other variables constant then this decrease in
quantity supplied is termed as CONTRACTION OF SUPPLY

Supply Schedule
Quantity
Price
Points Supplied
(P) (Q s )
A 5 50
B 4 40
C 3 30
D 2 20
F 1 10

Both Schedule and Graph shows that as we move from point “A” to point “F”, Price decrease
and Quantity supplied also decreases indicating that there is contraction in supply.

CHANGE IN SUPPLY

When any factor other than price, changes the selling plan of a producer

Or

When any factor other than price, changes the quantity supplied at given prices then there is a
change in supply.

Q(s) = F (P)

Supply changes in two ways:

1. Increase in Supply
2. Decrease in Supply

INCREASE IN SUPPLY

When any factor other than price, increases the quantity supplied at given prices then this
increase in quantity supplied is termed as increase in supply.

Prepared by: Dr Noman Saeed Email: economanics@yahoo.com

Lecture Notes: Business Economics Theory of Supply

Original Supply Schedule New Supply Schedule

Quantity Quantity
Price Price
Points Supplied Points Supplied

(P) (Q s ) (P) (Q s )
A 5 50 A' 5 60
B 4 40 B' 4 50
C 3 30 C' 3 40
D 2 20 D' 2 30
F 1 10 F' 1 20

When Supply increases, entire supply curve will shift downward to right.

DECREASE IN SUPPLY

When any factor other than price, decreases the quantity supplied at given prices then this
decrease in quantity supplied is termed as Decrease in supply.

Original Supply Schedule New Supply Schedule

Quantity Quantity
Price Price
Points Supplied Points Supplied

(P) (Q s ) (P) (Q s )
A 5 60 A' 5 50
B 4 50 B' 4 40
C 3 40 C' 3 30
D 2 30 D' 2 20
F 1 20 F' 1 10
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Lecture Notes: Business Economics Theory of Supply

When Supply decreases, entire supply curve will shift upward to left.

FACTORS THAT SHIFT Supply

1. NUMBER OF SUPPLIER
If suppliers in the market increases, the supply for daily use thing increases

No. of Supplier Increases , Supply Increases

Supply curve shifts downward to right

No. of Supplier Decreases , Supply Decreases

Supply curve shifts upward to left

2. Technology

Advancement in the technology will increase the productivity of labor and ultimately
reduce the cost of production. Given the price, when cost reduces, the profit margin of
the firm will increase and firm will increase quantity supplied, given the price. Therefore,
there is an increase in Supply.

Technology Increases , Supply Increases

Supply Curve shifts downward to right

Technology Decrease , Supply Decreases

Supply Curve shifts upward to left

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Lecture Notes: Business Economics Theory of Supply

3. PRICES OF RELATED GOODS

Change in the price of related goods in production such as substitute goods in
production or a complement good in production will change the Supply

Example of substitute good in Production

1. Same rice and chicken can be used to produce Chiken Biryani or Chikecn Pillao
2. Wood can be used to produce table or chair

Example of Complements in Production

1. Petrol, Deisel, Kerocyne Oil, Grease etc. are jointly produced

Price of Substitute Goods (P s )

P s Increases , Supply decreases
Supply Curve shifts upward to left

P s Decreases , Supply Inceases

Supply Curve shifts downward to right

Price of Complement (P c )
P c Increases , Supply Increases
Supply Curve shifts downward to right

P c Decreases , Supply decreases

Supply Curve shifts upward to left

4. EXPECTED FUTURE PRICES (Pe)

DAY Monday Tuesday Wednesday Thursday Friday

PRICE 2 3 4 5

Pe Increase , Supply Decreases

If it is expected that future price will increase then current period supply of the
commodity will decrease and Supply Curve shifts upward to left

DAY Monday Tuesday Wednesday Thursday Friday

PRICE 5 4 3 2

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Lecture Notes: Business Economics Theory of Supply

Pe Decrease , Supply Increases

If it is expected that future price will decrease then current period supply of the
commodity will increase and Supply Curve shifts downward to right

MARKET EQUILIBRIUM

Equilibrium in the market will occur when PRICE balance the buying and selling plan

Or

Equilibrium in the market will determine when Quantity demanded is equal to the quantity
supplied at some specific price.

Quantity Quantity
Price
Demanded Supplied
(P) (Q d ) (Q s )
7 100 700
6 200 600
5 300 500
4 400 400
3 500 300
2 600 200
1 700 100

EQUILIBRIUM PRICE

Price at which Quantity demanded is equal to Quantity supplied

EQUILIBRIUM QUANTITY

Quantity which is demanded or supplied at Equilibrium Price

Prepared by: Dr Noman Saeed Email: economanics@yahoo.com