SUPPLY

Prepared by
Farzana Yeasmin
Assistant Professor
Department of Agricultural Economics
Faculty of Agricultural Economics & Rural Sociology
Bangladesh Agricultural University,Mymensingh-2202
Meaning of Supply

• The quantity supplied of any good, service or resource is the amount

that people are willing and able to sell during a specified period at a
specified price.

• For example, when the price of Coke is $ 1.5 a bottle, the coke
manufacturer decides to sell 2000 bottles a day. The 2000 bottles a day
is the quantity supplied of coke by this individual producer.
 Supply and Stock
• Supply: Supply means the amount offered for sale at a given price.

• Stock: Stock is the total volume of a commodity which can be brought

into the market for sale at short notice and supply means the quantity
which is actually brought in the market.

• For perishable commodities, like fish, fruits supply and stock are the
same because whatever is in stock must be disposed off. The
commodities, which are not perishable, can be held back, if prices are
not favourable. If the price is high, large quantities are offered by the
sellers from their stock and vice-versa.
Supply function
• Supply function can be written as Qx = f (Px, PY, PI, T)

• The mathematical notation is read as follows:

• The quantity supplied of a good QX varies with the price of that

good Px, the price of other goods PY, the price of factor inputs
PI and technology T.
 The Law of Supply

The law of supply states:

Other things remaining the same, if the price of a good
rises, the quantity supplied of that good increases, and
if the price of a good falls, the quantity supplied of that
good decreases.
 Supply Schedule

• Supply is the relationship between the quantity supplied

and the price of a good when all the other influences on
selling plans remain the same. (ceteris paribus)

• A supply schedule is a list of quantities supplied at each

different prices when all the other influences on selling
plans remain the same.
 Supply Schedule
• Table 1 is one firm’s (Coca-Cola’s)
Table 1: Individual Supply Schedule supply schedule for coke. If the price
of Coke is .50 cents a bottle, Coca-
Cola plans to sell no Coke. Its
Point Price ($ per Quantity
bottle) Supplied
quantity supplied is zero bottles a
(thousands of day.
bottles per day) • If the price of Coke is $ 1 a bottle,
Coca-Cola’s quantity supplied
A 0.5 0
increases to 1000 bottles a day.
B 1.0 1 • Coca-Cola’s quantity supplied
increases to 2000 bottles a day at a
C 1. 5 2
price of $ 1.50 a bottle and to 3000
D 2.0 3 bottles a day at a price of $ 2.00 a
bottle.
 Supply curve

• A supply curve is a graph of the relationship between the quantity

supplied of a good and its price when all the other influences on
selling plans remain the same.
• The upward slope of the supply curve illustrates the law of supply.
Along the supply curve, when the price of the good rises, the quantity
supplied increases and when the price falls, the quantity supplied
decreases.
 Supply curve
Table 1: Individual Supply Schedule
2.5

D
Point Price ($ per Quantity 2

bottle) Supplied C

Price
1.5
(thousands of
bottles per B
1
day)
A 0.5 0 A
0.5
B 1.0 1
0
C 1. 5 2 0 0.5 1 1.5 2 2.5 3 3.5

D 2.0 3
Quantity Supplied
 Causes of Change of Supply
I. The supply of a commodity depends on the price of that commodity. The higher the price, the
greater is the supply.

II. Cost of production may rise due to increase in the prices of inputs or raw materials used in the
production result in a decrease in supply.

III. Better rainfall, improvement in irrigation, optimum dose of fertilizer, improved seeds and better
method of production generally increase supply of agricultural products. On the contrary, drought,
floods, fires, storms, pests, earthquakes etc. will decrease the supply.

IV. Improvement in techniques of production lower the cost of production and increase supply.

V. Improvement in the means of communication and transport may increase the supply of a commodity.

VI. Political disturbance or a war may disorganize or divert channels of trade and thus create scarcity.
 Causes of Change of Supply
VII. The supply of good is determined by the producer/ producing firm according to
their goals. They decide to produce more or less or stop production.

VIII. The supply also depends on the number of seller. Entry of more sellers will
increase and the exit will decrease the supply.

IX. If sellers fear that the prices will fall in the future, they will hasten to sell the
entire quantity and thus supply will increase. On the other hand, exception of price
rise in the future will induce them to withhold supply and the supply will decrease.

X. Supply may be decreased by agreement among the producers; agreement among

the oil producing countries to cut back production.
 Elasticity of Supply
• Elasticity of supply refers to the rate at which the supply of a
commodity varies when its price varies.
• Supply is said to be elastic if a variation in price causes more than
proportionate variation in supply and supply is said to be inelastic if a
variation in price causes a less than proportionate variation in supply.
• Example:
• Supply is elastic to such goods like Gold, Silver, Furniture etc.
• Supply is inelastic to such goods which are perishable like vegetables,
fish, milk etc.
 Price Determination : Equilibrium Between Demand
and Supply
• In the chapter of theory of demand we saw that the demand curve of a
commodity normally slopes downward.

• In the theory of supply we studied that the supply curve of a commodity usually
slopes upward. In other words, an industry will offer to sell more of a good at high
price than at a lower one.

• The level of price at which demand and supply curves intersect each other will
finally come to stay in the market. In other words, the price which will come to
prevail in the market is one at which quantity demanded is equal to quantity
supplied.
 Equilibrium price and quantity
• The price at which quantity demanded equals quantity supplied is called
equilibrium price, for at this price the two forces of demand and supply
exactly balance each other.

• The quantity of the good which is purchased and sold at this equilibrium
price is called equilibrium quantity. Thus, the intersection of demand and
supply curves determines price-quantity equilibrium.
Price Determination : Equilibrium Between Demand
and Supply
• Market moves to a price that equates the quantity of a good consumers are
willing and able to purchase (the quantity demanded) with the quantity of
the good the firms are willing to provide (the quantity supplied).

• When markets reach the point where quantity demanded equals quantity
supplied, they’re in equilibrium. Only at this point, all buyers and sellers
are satisfied. If prices were greater or less than the equilibrium price, the
buyers’ and sellers’ wishes would be inconsistent.
Price Determination : Equilibrium Between Demand
and Supply
• If price was greater than the equilibrium price, quantity supplied would exceed quantity
demanded. It means some of the sellers will not be able to sell the amount of the good they
wanted to sell.

• The unsatisfied sellers would try to dispose of the unsold amount of the good by bidding down
the price. The price will go on declining until the quantity demanded equals quantity
supplied.

• On the other hand, if price was lower than the equilibrium price, the quantity demanded
would exceed quantity supplied. Some buyers would not be able to obtain the amount of the
good they wanted to purchase at the prevailing price. They will therefore bid up the price in
their effort to get all they desired to buy.

• The price will go on rising until the quantity demanded and quantity supplied are again equal.
Illustration of the process of price determination with the aid of the demand and
supply schedules and the curves:

Price (Tk.) Quantity Quantity Supplied Pressure on

Demanded (In (In thousand- price
thousand- meters)
meters)
10 240 20
20 200 40
30 160 80
40 120 120 Equilibrium
50 80 160
60 40 200
70 20 240
 S
D

L K
P’’

H T
P’

S D

Figure: Determination of price through intersection of Demand and Supply curves

• In graphical terms, the equilibrium between
demand and supply is depicted in the above
figure, where DD is the demand curve
slopping downward and SS is the supply curve
sloping upward.

• Demand and supply are in equilibrium at point

E where two curves intersect each other. It
means that only at price op (corresponding to
the intersection point), the quantity demanded is
equal to quantity supplied. OQ is the
equilibrium quantity which is exchanged at
price OP.
• If price is greater than the equilibrium price, say
OP’’, the quantity offered to supply by the
sellers’ is P’’K. Thus LK is the excess supply
which the buyers will not take off from the
market at price OP’’.
• In order to dispose off this excess supply,
the sellers will compete with each other and
is doing so they will bring down the price.
Thus there will be tendency for the price to
fall to the level of equilibrium price OP.

• At price OP’, which is less than the

equilibrium price, the buyers demand P’T,
the sellers are prepared to supply only P’H.
HT represent excess demand. The
unsatisfied buyers will compete with each
other to obtain the limited supply.

• Thus there will be tendency for the price to

rise to the level of equilibrium price OP
where all wanting to buy and all wanting to
sell will be satisfied.
 Problem
• Suppose there are 5000 identical consumers and 1000 producers in the
market of potato. The individual supply and demand equation are as
follows:
Qd= 20-P and Qs = 40+ 5p
• Where, Qd = Quantity demanded of potato in kg
Qs = Quantity supplied of potato in kg
P= Price of potato (Tk/kg)
Derive market demand equation and market supply equation for potato.
And calculate the equilibrium price and quantity mathematically.
 Solution
Here, the individual demand equation,
Qd= 20-P
Market demand equation, Md= Qd * No. of consumers
= (20-P)*5000
=100000- 5000P
the individual supply equation,
Qs= 40 + 5P
Market supply equation, Ms= Qs * No. of producers
= (40 + 5P)*1000
=40000+ 5000P
We know that, At equilibrium,
Market demand = Market supply
 100000- 5000P = 40000+ 5000P
100000-40000 = 5000P+ 5000P
60000 = 10000P
P = 60000/10000
P = 6
So, equilibrium price is = Tk. 6/kg
Equilibrium quantity demanded = 100000- (5000*6)
= 70000 kg
Equilibrium quantity supplied = 40000 + (5000*6)
= 70000kg