Amity School of Business

Module 1: Supply, and

market equilibrium

By: Gaurav Shreekant

 Supply Amity School of Business

Supply: of a good refers to the quantity of

that good that a firm or an industry is
willing to sell or produce at a particular
price during a particular period of time.
 Factors affecting Supply
Amity School of Business
• Expected profits from sale (determined by selling price)
• Price of production substitutes
• Cost of Production (price of inputs)
• State of Technology
• Goals & objectives of firm (supplier)
• Extent of competition in the industry
• Government’s policies (controls, subsidies, tax & excise
incentives etc.)
• Means of transportation, rail-road-air connectivity,
communication, Banking & insurance, irrigation facilities,
electricity etc.
• Natural factors – fertility of land, climatic conditions
(monsoons, change in seasons), floods, drought, earthquake
etc.
 Law of Supply Amity School of Business

• Law of Supply: States that other factors

affecting supply kept constant, as the price
(selling) of a good rises, its quantity supplied
rises and vice-versa.
Supply Curve
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 Amity School of Business

Changes in Quantity Supplied versus Change in Supply

• Changes in Quantity Supplied: a movement along the supply

curve. This happens because of change in commodity’s own price.

• Change in Supply: a shift in the supply curve. This happens

because of change in any of the factors affecting supply, other than
commodity’s own price.
– Increase in supply: a shift to the right.
– Decrease in supply: a shift to the left.
A Change in Supply versus a Change in Quantity Supplied
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 Price Elasticity of Supply
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• A measure of the extent to which the quantity

supplied of a good changes when its price
changes, all other factors affecting supply
remaining the same (ceteris paribus).

• Price Elasticity of Supply (Es)

= % Change in Quantity Supplied
% Change in Price
 Factors determining Elasticity of Supply
Amity School of Business

• Ease with which increases in output can be obtained without

much rise in selling price.
• Response of producers to changes in price - at times they
may not exhibit profit maximizing behaviour
• Availability of inputs
• Possibility (ease) of substitution of one product by the other
(s)
• Length of time available to producers during which they have
to respond to a given change in price of the product.
 Equilibrium of Amity School of Business

Price of
Supply and Demand
Ice-Cream
Cone
Supply
3.00

2.50 Equilibrium

2.00

1.50

1.00

0.50 Demand
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones