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Supply Theory and Analysis
Supply Theory and Analysis
Lecture - 7
- Supply
- shift in supply
- market equilibrium
- consumer surplus
- producer surplus
- changes in market equilibrium
1
Chapter-3: Supply Theory and Analysis
Supply and some basic concepts:
Supply: Supply is the quantity of a good
or service that offered for sale in a
market during a given period of time
which is called quantity supplied and
denoted as Qs.
The time frame might be an hour, a day,
a month, or a year or so…
2
Chapter-3: Supply Theory and Analysis
The amount of good or service offered
for sale depends on an extremely large
number of variables.
As in the case of demand, economists
ignore all the relatively unimportant
variables in order to concentrate on
those variables that have the greatest
effect on quantity supplied.
The major variables are… 3
Chapter-3: Supply Theory and Analysis
Supply depends on…
- the price of the good it self
- price of input used to produced it
- prices of goods related in production
- level of available technology
- producer expectations of future price
- number of firms / productive capacity
4
Chapter-3: Supply Theory and Analysis
The general supply function:
The general supply function show how
all six of the variables jointly determine
the quantity supplied an expresses as…
Qs = f(P, Pi, Pr, T, Pe, F)
Quantity of supply depends not only on
the price of the product but also some
other factors…
5
Chapter-3: Supply Theory and Analysis
i. Higher the price of a product greater
the supply of the product, there is a
positive relation between price and
supply quantity.
ii. An increase in price of one or more of
the inputs increases the production cost,
as cost rises, goods become less profitable
and producers will want to supply less
quantity at each price. 6
Chapter-3: Supply Theory and Analysis
iii. Changes is the price of goods that are
related in production may affect either
ways depending on whether the good is
substitutes (wheat/corn) or complements
(Oil field crude oil and by product gas).
iv. Better the technology, increasing the
productivity, reducing cost, increasing
profits allowing the producers to supply
more remaining all other things same. 7
Chapter-3: Supply Theory and Analysis
v. If the suppliers expects that price of
goods they produce will rise in future,
they will withheld and reduce current
supply hoping to catch higher revenue in
the future.
vi. As more number of firms in the
industry, the productive capacity of the
industry increases thereby supplying
more at the same price. 8
Chapter-3: Supply Theory and Analysis
As in the case of demand, economists
often find it useful to express the general
supply function in linear form
Qs = h + kP + lPi + mPr + nT + rPe +sF
Where, Qs, P, Pi, Pr, T, Pe, F defined
earlier and h is an intercept parameter, k,
l, m, n, r, and s are the slope parameters.
The summary of the discussion shown…
9
Chapter-3: Supply Theory and Analysis
Variable Relation to Qty Slope parameters
Supplied
P (Price) Direct k = ∆Qs / ∆P is positive
Price
160
140 2400, 140
Price of goods
s S’
Price Price
Price Price
Q Q
Q’ Q Q’ 0’ Q 0’ Q
Increase in Supply Decrease in Supply
19
Chapter-3: Supply Theory and Analysis
Determinants of Supply Supply Supply Sign of
increases decreases slop
20 0 1200 -1200
25
Chapter-3: Supply Theory and Analysis
Excess Supply:
Surplus exists when quantity supplied
exceeds quantity demanded because more
sellers are interested to sell as there is higher
price.
Excess Demand:
Shortage exists when quantity demanded
exceeds quantity supplied because more
buyers are interested to buy as there is lower
price. 26
Chapter-3: Supply Theory and Analysis
Market Clearing price:
The price of a good at when buyers can
purchase all they want and sellers can
sell all they want at the equilibrium price
Because of this clearing of the market,
equilibrium price is sometimes called the
market clearing price. Qd = Qs
1400 – 10P = - 400 + 20P
Therefore, P = 60, Qd = 800, Qs = 800.
27
Chapter-3: Supply Theory and Analysis
Equilibrium Price and Quantity
Price
140
Surplus
600 unit
100
Supply
E
60 Shortage
600 unit
Demand
20
Consume
r surplus
r
100
Supply
v s a
60
Demand
20
r Producers
100
Surplus
Supply
v s a
60
t
Demand
20
w
E’
P’
E
P E’ D’
P’
D
D’
Q’ Q Q’ Quantity
39
Chapter-3: Supply Theory and Analysis
Changes in supply (demand constant)
Price S’
S
S’
E’
P’ E
P E’
P’
D
Q’ Q Q’ Quantity
40
Chapter-3: Supply Theory and Analysis
Changes both in supply and demand
Price S’
S
S’
E
P
D’
D’
Q Quantity
41
Chapter-3: Supply Theory and Analysis
Both demand and supply increases
Price S
S’
S’’
E’
P’ E E’’
P
D’
Q Q’ Quantity
Price may rise or fall but quantity rises 42
Chapter-3: Supply Theory and Analysis
Demand decreases and supply increases
Price S
S’
S’’
E
P
P’ D
P’’ D’
Q’ Q Q’ Quantity
Price falls but quantity may rise or fall 43
Chapter-3: Supply Theory and Analysis
Demand increases supply decreases
S’’
Price S’
S
P’
E
P
D’
Q’ Q Q’ Quantity
Price rises quantity may rise or fall 44
Chapter-3: Supply Theory and Analysis
Demand decreases supply decreases
S’’ S’
Price S
P’ E
P
P’
D
D’
Q’ Q’ Q Quantity
Price may rise or fall, quantity falls 45
Chapter-3: Supply Theory and Analysis
Thank you!
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