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Supply ANALYSIS

By

Dr. Hafeez ur Rehman

Professor
Department of Economics and Quantitative Methods (HSM)
University of Management and Technology, Lahore.
Supply ANALYSIS
• Outline of the lecture
- Supply Analysis
- Difference between stock and supply
- Law of supply
- Non price factors of supply
- Movement Vs shift in supply curve
 SUPPLY Analysis
• Supply is related to behavior of a producer/ firm.
• Objective of a firm
• The main objective of a firm is to maximize the
profit.
• Profit = Revenue – Cost
• Revenue = Price x Quantity
• When the price ↑ then TR ↑ as a result profit ↑
then Suppliers will increase the quantity supplied.
Stock vs supply

• Stock is the amount of goods and services that

the seller is not interested to sell at market/
Current price.

• Supply is the amount of goods and services that

the seller is interested to sell at market/ current
price.
Law of supply
Law of Supply

• Other things remain constant (ceteris

paribus) if price of a product ↑ quantity
supplied ↑ and vice versa.
• Mathematically,

• Qs = f (P)
Cont…
Cetris Peribus/Non price
factors of supply
Ceteris paribus /Non Price Factors of
Supply
•Non-price factors of supply are following:

i. Price of raw material

ii. Price of electricity
ii. Price of Petrol/ Gas
iv. Wages
v. Interest Rate
vi. Technology
vii. Taxes
viii. Subsidies
i) Price of raw Material

• If price of raw material ↑ then cost of production

↑ then profits ↓ then supply ↓ then supply curve
will shift to the leftward.

ii) Price of Electricity

• If price of electricity ↑ then cost of production ↑
then profits ↓ then supply ↓ then the supply
curve will shift to the leftward.
 ii) PRICE OF PETROL

• If price of petrol ↓ then the cost of production ↓

then profits ↑ then supply ↑ and the supply curve
will shift to the rightward.
iii) Wages
• If wages ↓ then cost of production ↓ then profits
↑ then supply ↑ and the supply curve will shift to
the rightward.
 iv) Interest rate
• If interest rate/ cost of borrowing ↑ then cost of
production ↑ then profits ↓ then supply ↓ and
the supply curve will shift to the leftward.

v) Technology
• If there is an improvement in technology then cost
of production ↓ then profits ↑ then supply ↑ and
the supply curve will shift to the rightwards.
 vi) TAXES
• If government ↑ taxes then cost of production
↑ then profits ↓ then supply ↓ and the supply
curve will shift leftward.

vii) Subsidies
• If government ↑ subsidies then cost of
production ↓ then profits ↑ then supply ↑ and
the supply curve will shift to the rightward.
Movement vs shift in
Supply Curve
Movement in Supply Curve
• If there is a change in quantity supplied because of change
in price, then there is a movement along the same supply
curve (we move from one point to another point along the
same supply curve).
•
Shift in Supply Curve
• If there is a change in supply because of change in
non-price factors, then there will be shift in supply
curve.
• If S ↑, Supply curve
• Shifts right ward (S2).
• If S ↓, Supply curve
• Shifts left ward (S1).
Change in Quantity Supplied

vs

Change in Supply
Change in Quantity supplied VS Change in supply

• If Price changes as a result Quantity supplied

changes. This is called as change in quantity
supplied.

• If non-price factors change as a result supply

changes. This is called as change in supply.
 Class Activities
Q How would each of the following affect the
Pakistan’s market supply curve of corn?
i. A new and improved crop rotation technique
is discovered.
ii. The price of fertilizer rises.
iii. The government offers new tax breaks to
farmers.
Market Equilibrium
• Outline of the lecture
1. Equilibrium
2. Market Equilibrium
3. Mathematical Derivation of Market Equilibrium
4. Numerical example of Market Equilibrium
5. Impact of change in demand & supply on equilibrium price
and equilibrium quantity
 Market Equilibrium
• Equilibrium is defined to be a situation in which
there is no tendency for change.

• Market Equilibrium: A situation when supply and

demand are equal.
• Mathematically
Qd = Qs or D = S
Market Equilibrium
 Cont…
• At equilibrium point, demand curve intersect
supply curve and we get equilibrium price (P*)
and equilibrium quantity (Q*). ( see diagram)

• When the market is in equilibrium, there is no

shortage or surplus. This indicates that resources
are properly utilized.
 MATHEMATICAL DERIVATION OF
DEMAND AND SUPPLY
• There are following demand and supply equations
Qd=a-bp-------------------i
and Qs= -c+dp-----------------ii
The market equilibrium condition is
Qd = Qs -------------------iii
Substitute equations i and ii in equation iii
a-bp = -c+dp
 Cont….
Rearranging
a+ c = bp+ dp
a+c = p(b+d)
P* = (a+c)/(b+d)
Now plug the value p* into equation (i) we get
Qd = a-bp
Q* = a – b[(a+c)/(b+d)]
Q* = (ad-bc)/(b+d)
 Numerical Example
• Consider the following demand and supply equations
• Qs = —45 + 8P---------------i
Qd = 125 — 2P -------------ii
Find Equilibrium price and equilibrium quantity.
Solution:
The market equilibrium condition is
Qd = Qs-----------------------iii
Substituting equations i and ii in equation iii
125- 2P = -45 + 8P
 Numerical Example
• Rearranging
• 125 + 45 = 2P + 8P
170 = 10P
P* = 170/10
P* = 17
For finding the equilibrium quantity, plug the value p*
in equation i or equation ii we get
Qd = 125- 2P
Qd = 125 – 2(17) = 125-34 = 91 Q* = 91
Impact of changes in demand &
supply on equilibrium price
and equilibrium quantity
Cont…
• These are major cases of demand and supply change
• Case A
When demand changes and supply remains same.
• Case B
Supply changes and demand remains same.
• Case C
When demand and supply both increase.
• Case D
When demand and supply both decrease.
• Case E
When demand increases and supply decreases.
• Case F
When demand decreases and supply increases.
 Case A: When demand changes
and supply remains same.
• When demand changes and supply remain same then there
will be two conditions where
1. D ↑ and supply remains same.
Solution: P* ↑ Q* ↑

2. D ↓ and supply remains same.

Solution: P* ↓ Q* ↓
 Case B: Supply changes and
demand remains same.
• When Supply changes and demand remains same then there
will be two conditions where
1. Supply ↑ and demand remains same.
Solution: P* ↓ Q* ↑

2. Supply ↓ and demand remains same.

Solution: P* ↑ Q* ↓
 Case C: When demand and supply
both increase.
• When demand increases and supply increases there will be three
following possibilities.
1. D ↑ > S ↑
Solution: P* ↑ Q* ↑ but ↑ Q* > ↑ P*

2. D ↑ < S ↑
Solution: P* ↓ Q* ↑ but ↑ Q* > ↓ P*

3. D ↑ = S ↑
Solution: P* remains same Q* ↑
Case D: When demand and supply both
decrease.
• When demand decreases and supply decreases there will be three following
possibilities.
1. D ↓ > S ↓
Solution: P* ↓ Q* ↓ but ↓ Q* > ↓ P*

2. D ↓ < S ↓
Solution: P* ↑ Q* ↓ but ↓ Q* > ↑ P*

3. D ↓ = S ↓
Solution: P* remains same Q* ↓
 Case E: When demand increases and
supply decreases.
• When demand increases and supply decreases there will be three following
possibilities.
1. D ↑ > S ↓
Solution: P* ↑ Q* ↑ but ↑ P* > ↑ Q*

2. D ↑ < S ↓
Solution: P* ↑ Q* ↓ but ↑ P* > ↓ Q*

3. D ↑ = S ↓
Solution: P* ↑ Q* remains same
 Case F: When Demand decreases and
supply increases
• When demand decreases and supply increases there will be three following
possibilities.
1. D↓ > S ↑
Solution: P* ↓ Q* ↓ but ↓ P* > ↓ Q*

2. D↓ < S ↑
Solution: P* ↓ Q* ↑ but ↓ P* > ↑ Q*

3. D↓ = S ↑
Solution: P* ↓ Q* remains same
Class Activities
Q:1 How will an increase in the birthrate affect the
equilibrium price of land?

Q:2 What will happen on equilibrium price and equilibrium

quantity if some thing comes into the fashion what will
be its impact on equilibrium price?

Q:3 A Dell computer is a substitute for a HP computer.

What will happen on the equilibrium price and
equilibrium quantity if the price of Dell falls?
THANKS