 Supply is a fundamental economic concept that

describes the total amount of a specific good or

service that is available to consumers.

 Supply can relate to the amount available at a

specific price or the amount available across a
range of prices if displayed on a graph.
 Supply is the quantity of a product that a producer
is willing and able to supply onto the market at a
given price in a given time period.
 The law of supply - as the price of a product rises,
so businesses expand supply to the market. A
supply curve shows a relationship between price
and how much a firm is willing and able to sell
 The law of supply is accounted for by two
factors:

– When prices of their product rise, firms

arrange their activities to supply more of the
good to the market, substituting production of
that good for the production of other goods.
– Assuming firms' costs are constant, a higher
price means higher profits.
– Or, assuming firms’ costs rise as production
increases, they must raise price to cover their
cost increase.
 There are three main reasons why supply curves
are drawn as sloping upwards from left to right
giving a positive relationship between the market
price and quantity supplied:
 The profit motive
 Production and Costs
 New entrants into the market
 When the market price rises following an increase
in demand, it becomes more profitable for
businesses to increase their output
 When output expands, a firm's production costs
tend to rise, therefore a higher price is needed to
cover these extra costs of production. This may be
due to the effects of diminishing returns as more
factor inputs are added to production.
 New entrants coming into the market: Higher
prices may create an incentive for other
businesses to enter the market leading to an
increase in total supply.
CLARENCE BROWN'S • A supply schedule is a table
SUPPLY SCHEDULE showing how much of a product
FOR SOYBEANS
firms will supply at different
QUANTITY
SUPPLIED prices.
PRICE (THOUSANDS
(PER
BUSHEL)
OF BUSHELS
PER YEAR)
• Quantity supplied represents the
$ 2 0 number of units of a product that
1.75 10
2.25 20
a firm would be willing and able to
3.00 30 offer for sale at a particular price
4.00 45 during a given time period.
5.00 45
 • A supply curve is a graph illustrating how much
of a product a firm will supply at different prices.

Price of soybeans per bushel ($)

CLARENCE BROWN'S 6
SUPPLY SCHEDULE
5
FOR SOYBEANS
QUANTITY
4
SUPPLIED 3
PRICE (THOUSANDS
(PER OF BUSHELS 2
BUSHEL) PER YEAR) 1
$ 2 0
1.75 10 0
2.25 20
0 10 20 30 40 50
3.00 30 Thousands of bushels of soybeans
4.00 45 produced per year
5.00 45
 While supply price is the most important
factor that affects the sale of a good, it is
not the only factor.
 Other factors, termed supply determinants,
are also important.
 These determinants cause a change in the
supply of a good, that is, more or less of
the good is sold at existing prices.
 Resource Prices: The prices paid for the use
of resources in the production process
affects production cost and the ability to sell
a good. If resource prices increase, then
sellers are able to sell less of a good.
 Technology: The information and techniques
known about the production process has a
direct impact on the ability to sell a good. If
sellers have an advance in
production technology, then they are able
to sell more of a good
 Prices of Other Goods: The supply of one
good is interrelated with the production of
other goods, and the prices of those goods.
 Some goods are substitutes, others are
complements, produced jointly with the
same resources.
 If the price of a substitute good increases,
then sellers switch to the production of that
good and sell less of this good. If the price
of a complement good increases, then
sellers produce more of both goods.
 Number of Sellers: The total number of
sellers participating in a market affects how
much of a good is supplied.

 If there is an increase in the number of

sellers, then there is a greater supply of the
good.
 Sellers' Expectations: Sellers decide how
much to sell based on a comparison of
current and expected future prices.

 If sellers expect a higher price in the future,

then they sell less of a good today.
 Government policies can have a significant impact
on supply.

 For example: If the government imposes

a subsidy on the good, then Supply increases
while a tax on the goodwill has the opposite effect
of decreasing Supply.
 Time
 Over time, firms can increase capacity and can
increase Supply.
 A Change in Quantity Supplied:
This is a change in the specific amount of the
good that sellers are willing and able to sell.
It is caused by a change in the supply price
and is indicated by a movement along the
supply curve from one point to another.
 A Change in Supply:
This a change in the overall supply relation,
It is caused by a change in one of the supply
determinants and is indicated by a shift of
the supply curve.
  The law of supply
Price of soybeans per bushel ($)

6
5 states that there is
4 a positive
3 relationship
2 between price and
1
quantity of a good
0
supplied.
0 10 20 30 40 50
Thousands of bushels of soybeans  This means that
supply curves
produced per year

typically have a
positive slope.
 • A change in supply is
not the same as a
change in quantity
supplied.
• In this example, a higher
price causes higher
quantity supplied, and
a move along the
demand curve.
• In this example, changes in determinants of supply, other
than price, cause an increase in supply, or a shift of the
entire supply curve, from SA to SB.
• When supply shifts
to the right, supply
increases. This
causes quantity
supplied to be
greater than it was
prior to the shift, for
each and every price
level.
To summarize:

Change in price of a good or service

leads to

Change in quantity supplied

(Movement along the curve).

Change in costs, input prices, technology, or prices of

related goods and services
leads to

Change in supply
(Shift of curve).
To summarize:

Change in price of a good or service

leads to

Change in quantity supplied

(Movement along the curve).

Change in costs, input prices, technology, or prices of

related goods and services
leads to

Change in supply
(Shift of curve).
 The supply of a good or service can be
defined for an individual firm, or for a group
of firms that make up a market or an
industry.
 Market supply is the sum of all the quantities
of a good or service supplied per period by
all the firms selling in the market for that
good or service.
 As with market demand, market supply is the
horizontal summation of individual firms’
supply curves.
 (1) (2) (3) (4) (5)
Quantities Price Ann's Barry's Charlie's Market
Supplied (in dollars) Supply Supply Supply Supply
A $0.00 0 0 0 0
B 0.50 1 0 0 1
C 1.00 2 1 0 3
D 1.50 3 2 0 5
E 2.00 4 3 0 7
F 2.50 5 4 0 9
G 3.00 6 5 0 11
H 3.50 7 5 2 14
I 4.00 8 5 2 15
 Charlie Barry Ann Market Supply
$4.00 I
Price per cassette (in dollars)

3.50 H
3.00 G
2.50 F
2.00 E
1.50 D
1.00 C
0.50 B CA
0 A
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quantity of cassettes supplied (per week)
 The operation of the market
depends on the interaction
between buyers and sellers.
 An equilibrium is the condition
that exists when quantity
supplied and quantity demanded
are equal.
 At equilibrium, there is no
tendency for the market price to
change.
Equilibrium occurs at a price of $3 and a
quantity of 30 units.
© OnlineTexts.com p. 34
 Only in equilibrium
is quantity supplied
equal to quantity
demanded.
• At any price level
other than P0, the
wishes of buyers
and sellers do not
coincide.
 A shortage occurs when quantity demanded
exceeds quantity supplied.
◦ A shortage implies the market price is too low.
 A surplus occurs when quantity supplied
exceeds quantity demanded.
◦ A surplus implies the market price is too high.

© OnlineTexts.com p. 36
 Excess demand, or
shortage, is the
condition that exists
when quantity
demanded exceeds
quantity supplied at
the current
• When price.
quantity demanded
exceeds quantity
supplied, price tends to
rise until equilibrium is
restored.
 Excess supply, or
surplus, is the condition
that exists when quantity
supplied exceeds
quantity demanded at
the current price.

• When quantity supplied

exceeds quantity
demanded, price tends to
fall until equilibrium is
restored.
 Higher demand leads to  Higher supply leads to
higher equilibrium price lower equilibrium price
and higher equilibrium and higher equilibrium
quantity. quantity.
 Lower demand leads to  Lower supply leads to
lower price and lower higher price and lower
quantity exchanged. quantity exchanged.
 A change in any variable other than price that
influences quantity demanded produces a shift
in the demand curve or a change in demand.
 Factors that shift the demand curve include:
◦ Change in consumer incomes
◦ Population change
◦ Consumer preferences
◦ Prices of related goods:
 Substitutes: goods consumed in place of one another
 Complements: goods consumed jointly

© OnlineTexts.com p. 41
This demand curve has shifted to the right. Quantity
demanded is now higher at any given price.
© OnlineTexts.com p. 42
The shift in the demand curve moves the
market equilibrium from point A to point B,
resulting in a higher price and higher quantity.
© OnlineTexts.com p. 43
 A change in any variable other than price that
influences quantity supplied produces a shift
in the supply curve or a change in supply.
 Factors that shift the supply curve include:
◦ Change in input costs
◦ Increase in technology
◦ Change in size of the industry

© OnlineTexts.com p. 44
For an given rental price, quantity supplied is
now lower than before.
© OnlineTexts.com p. 45
The shift in the supply curve moves the market equilibrium
from point A to point B, resulting in a higher price and
lower quantity.
© OnlineTexts.com p. 46
 Price elasticity of supply measures the
responsiveness of quantity supplied to a change in
price.
 The price elasticity of supply (PES) is measured
by % change in Q.S divided by % change in price.

 If the price of a cappuccino increases 10%, and

the supply increases 20%, the PES is 2.0.

 If the price of bananas falls 12% and the quantity

supplied falls 2%, the PES = 2/12 = 0.16
 Inelastic supply – a change in price causes a
smaller proportional change in quantity supply

 Elastic supply – a change in price causes a bigger

proportional change in supply
 This means that an increase in price leads to a
smaller % change in supply. Therefore PES <1
 Firms operating close to full capacity.
 Firms have low levels of stocks, therefore there are no
surplus goods to sell.
 In the short term, capital is fixed in the short run e.g. firms
do not have time to build a bigger factory.
 If it is difficult to employ factors of production, e.g. if highly
skilled labour is needed
 With agricultural products, supply is inelastic in the short
run, because it takes at least six months to grow new
crops. In September the farmer cannot suddenly produce
more potatoes if the price goes up.
 Nuclear reactors – It takes considerable time and
expertise to build a new reactor. If there is high
demand, few firms would be able to increase output in
quick time
 Grapes – Harvest is once a year, so in short-term,
supply would be very inelastic.
 Flood defences – If there is heavy rainfall and
flooding, there would be high demand for flood
defences. But, to supply barriers against the floods
cannot occur overnight. It will take many months of
construction to build.
 This occurs when an increase in price leads to a
bigger % increase in supply, therefore PES >1
 PES
 % change in Q.S. = 110-60/60 = 0.8333
 % change in Price = 106-80/80 = 0.325
 PES = 2.56
 If there is spare capacity in the factory.
 If there are stocks available.
 In the long run, supply will be more elastic
because capital can be varied.
 If it is easy to employ more factors of production.
 If a product can be sold from the internet which
increases the scope of international competition
and increases options for supply.
 Fidget spinners. These goods are relatively easy to make,
requiring only basic raw materials of plastic. Many
manufacturing firms could easily adapt production to
increase supply.
 Taxi services. It is relatively easy for people to work as a
taxi driver. People can work part-time and only need a
qualified driving license. With mobile apps like Uber, it has
also become easier to fit consumers with a broader range
of options. If price rises, Uber can offer higher wages and
encourage more people to come out to work. There are still
some supply constraints on very popular days. But, mostly,
supply is quite elastic.
 There are three extreme cases of PES.
1. Perfectly elastic, where supply is infinite at any
one price.
2. Perfectly inelastic, where only one quantity can be
supplied.
3. Unit elasticity, which graphically is shown as a
linear supply curve coming from the origin.
 Because a high PES is desirable, it may be
necessary for firms to undertake actions that
improve their speed of response to changes in
market conditions. Examples of these actions
include:
1. Creating spare capacity
2. Using the latest technology
3. Keeping sufficient stocks
4. Developing better storage systems
5. Prolonging the shelf life of products
6. Developing better distribution systems
7. Providing training for workers
8. Having flexible workers who can do a range of jobs
9. Locating production near to the market
10.Allowing inward migration of labour if there is a labour shortage
 There are five cases of Price Elasticity of Supply which are discussed below:
 #1 – Perfectly Inelastic Supply
 The price elasticity of supply in such a case is zero which is indicative of the
fact that the supply would remain the same irrespective of the price of the
commodity.
 #2 – Inelastic Supply
 In the case of inelastic supply, the change in supply is relatively less than the
change in price. As such, in this case, assumes a value which is less than 1.
 #3 – Unitary Elastic Supply
 In such a case, the change in supply quantity is exactly equal to the change
in its price. As such, in this case, is equal to one.
 #4 – Elastic Supply
 In the case of elastic supply, the change in supply is relatively greater than
the change in price. As such, in this case, assumes a value which is greater
than 1.
 #5 – Perfectly Elastic Supply
 In such a case, the supply quantity becomes zero even with a slight fall in
price and becomes infinite with a slight increase in price. This indicates that
the suppliers are willing to supply an unlimited quantity of the commodity at
a higher price.
 It is very important for a business to appreciate the concept and use of
this supply to understand the relationship between the price of a good
and the corresponding quantity of the commodity that the supplier is
willing to supply at that price. It can be used to decide on the batch
production of various products.
 In case the supply quantity fluctuates a lot when the price varies a little,
then the product is said to be elastic. This often happens in the case of
popular products or services that are in short supply for instance. In
such a scenario when the price goes up the supplier increases the
output immediately.
 In case the quantity supplied changes by a very small margin despite a
significant change in prices, then the product is said to be inelastic. This
happens when there is a limited supply for the product or service and as
such the supplier can’t supply despite higher prices.
 Let us take the simple example of pizza. Now let us assume that a
surge of 40% in pizza price resulted in an increase in the supply of
pizza by 25%.

 Let us assume that there is a company which has installed vending

machines for supplying soft drinks. At present, the vending machines
sell soft drinks at $3.50 per bottle. Now at this price, the
manufacturer supplies 4,000 bottles per week. However, due to
some governmental ban, the price has declined to $3.00 which has
resulted in a lower supply of 3,000 bottles per week. Now, the price
elasticity of supply can be calculated as below:
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