Analysis of Supply

Concept

Definition: Quantities of the good which the seller is willing and able to sell at different prices in a given market, at a particular point of time, other things remaining same Law of Supply: More of a good is supplied at higher prices and less at lower prices. With price increase, there is motivation to sellers to produce/supply more to increase their profits Supply Schedule: table depicting quantities supplied at various prices Supply Curve: supply schedule presented in a graph Supply curve is upward sloping due to positive relationship between quantities supplied and prices

Exceptions to the law of supply:

stock surpluses with producers/ sellers change in technology change in tastes/ preferences/habits national/ international events/ natural calamities

Factors Affecting Supply

Price of the good: directly related to quantity supplied Prices of other related goods: with change in price of related goods, switch to other attractive related options Prices of inputs (factors of production): Increase in prices of factors of production will increase cost of production of the good and hence reduce their quantities supplied, or same quantity is supplied at a higher price State of technology: better technology will reduce costs, increase output and thus increase qty. supplied Level of competition and size of the industry, entry barriers to an industry Government Policies Non- economic factors: like weather/natural factors on farming, innovations in computer industry, expectation about future prices ..

Change in Supply

Change in supply/ shift in supply curve: means increase/ decrease in qty. supplied at a given price; due to factors other than price of the good concerned

Movement along the supply curve: is due to change in price of good: extension/ increase in supply, or contraction/ decrease in supply

Decrease in supply: supply curve shifts leftwards, less qty supplied at same price Increase in supply: supply curve shifts rightwards, more qty. supplied at same price

Price Elasticity of Supply

Refers to %ge change in qty supplied due to one % change in price of that good

Unitary elastic Relatively elastic Perfectly elastic Relatively inelastic Perfectly inelastic

% change in Q = % change in P Es = 1 % change in Q > % change in P 1<Es < infinity % change in price=0 Es = infinity

% change in Q < % change in P 0< Es < 1 % change in Q = 0 Es = 0

Market Equilibrium of Supply and Demand

Equilibrium price is that price at which total demand for any good = total supply of that good in the market It is at the intersection point of supply and demand curves Equilibrium price and quantity at this point Higher price than equilibrium price will mean demand is less/ excess supply over demand, thus creating competition amongst sellers, forcing them to reduce prices, this increases demand until equilibrium price reached Lower price than equilibrium price means demand is more/ shortage of supply, thus creating competition amongst buyers, pushing up prices, which then motivates suppliers to increase qty. supplied, until equilibrium price is reached

Effect of a shift in Supply/Demand Curve

Demand and supply Effect on price and shifts quantity
If demand rises If demand falls If supply rises If supply falls Demand curve shifts to right Demand curve shifts to left Supply curve shifts to right Supply curve shifts to left Both price and qty. increases Both price and qty. falls Price falls but qty. increases Price increases but qty. decreases

Simultaneous Shifts of Supply and Demand

New equilibrium price and qty. may be more/less/equal to initial equilibrium levels depending upon magnitude and direction of shifts of the two curves; if equal shifts in same direction, then no change in price Thus demand and supply curves help to determine not only equilibrium price and qty. but also change in price and change in qty. in the event of shift in demand and supply curves

Consumer Surplus and Producer Surplus

Consumer Surplus:

Producer Surplus:

Excess price that the consumers are willing to pay over and above the current market price Area of triangle in demand curve above the current market price
Excess of current market price above the minimum price at which producers are ready to supply a good Area of triangle below the current market price on the supply curve