What Is Supply?

Factors Affecting Supply

Elasticity of Supply
Lecture Notes

152
 What Is supply?

All suppliers of products must decide how much to offer

for sale at various prices. The decision made according to
what is best for the individual seller. What is best depends,
in turn, upon the cost of producing the goods or services.

The amount of a product that would be

offered for sale at all possible prices that could
prevail in the market.

153
Lecture Notes

154
 The supply schedule is a listing of the various quantities of a
particular product supplied at all possible prices in the market.

EX.

Table (6) shows a hypothetical supply schedule for CDs. It shows

the quantities of CDs that will be supplied at various prices, other
things being equal. If you compare it to the demand schedule in
chapter 3, you will see that the two are remarkably similar. The
main difference between them is that for supply, the quantity
goes up when the price goes up—rather than down as in the
case of demand.

155
 price
S

Quantity
Points price 25
supplied A

20
B
A 25 7
15
B 20 6 C
10
C 15 5 D
5
E
D 10 3
0
E 5 0 1 2 3 4 5 6 7 Quantity
supplied
Figure (25): Supply curve
Table (6): Supply schedule

156
 Supply curve is a graph (curve) showing the various
quantities supplied at all possible prices that might prevail in
the market at any given time.

All normal supply curves have a positive slope that goes up

from the lower left-hand corner of the graph to the upper
right-hand corner. This shows that if the price goes up, the
quantity supplied will go up too.

The supply schedule and the supply curve are similar in that
Note they both show the same information—one in the form of a
table and the other in the form of a graph.

157
Lecture Notes

158
The market supply curve is the curve that shows the quantities
offered at various prices by all firms that offer the product for
sale in a given market.

To obtain the data for the market supply curve, add the
number of CDs that individual firms would produce, and then
plot them on a separate graph. In Figure (26), point a on the
market supply curve represents eight CDs—four supplied by
the first firm and two by the second—that are offered for sale
at a price of $15. In the same way, point b on the curve
represents a total of ten CDs offered for sale at a price of $20.

159
 price 25 20 15 10 5
Quantity supplied (firm A) 7 6 5 3 0
Quantity supplied (firm B) 5 4 3 2 1
Quantity supplied (Market) 12 10 8 5 1
Table (7): Individual and market supply schedule

price Firm A price price Market

Firm B
S S
S
25 25 25

20 20 20
b
15 15 15 a
10 10 10
5 5 5

0 0 0
3 5 6 7 1 2 3 4 5 Quantity 1 5 8 10 12 Quantity
Quantity
supplied supplied supplied

Figure (26): Individual and market supply curve

160
 The law of supply states that the quantity supplied varies
positively with the price. When the price of something goes
up, the quantity supplied goes up. Likewise, when the price
goes down, quantity supplied goes down.

When the quantity

When quantity price goes supplied
the price supplied down goes down
goes up goes up

Figure (27): the law of Supply

161
Lecture Notes

162
 Factors Affecting Supply

When it comes to supply, there are two types of changes. When

the price of a product changes while all other factors remain the
same, we have a change in the quantity supplied. Sometimes
other factors change while the price remains the same. When this
happens, we see a change in supply.

163
Lecture Notes

164
The quantity supplied is the amount that producers bring to market
at any given price. A change in quantity supplied is the change in
amount offered for sale in response to a change in price. The change
in quantity supplied, graphically, represented as a movement along
the supply curve.

The change in quantity supplied can be an increase or a decrease,

depending on whether more or less of a product is offered. For
example, the movement from a to b in Figure (28) shows an increase
because the number of products offered for sale goes from three to
five when the price goes up. If the supply curve had been from point
b to point a, there would have been a decrease in quantity supplied
because the number of products offered for sale went down.

165
 price S

25

20

15 b

10 a
5

0
3 5 6 7 Quantity supplied

Figure (28): change in quantity supplied

It makes no difference whether we are talking about an

individual supply curve or a market supply curve. In either case,
Note
a change in quantity supplied takes place whenever a change in
price affects the amount of a product offered for sale.

166
 The change in supply is a situation where suppliers offer different
amounts of products for sale at all possible prices in the market. The
change in supply, graphically, represented as a shift of the supply
curve, right or lift. The entire supply curve shifts to the right to show
an increase in supply, or to the left to show a decrease in supply.

A change in supply results in an entirely new supply curve, while a change

Note
in quantity supplied is a movement along the original supply curve.

When supply changes, a new schedule or curve must be constructed

to reflect that producers are willing to offer more CDs for sale at every
price than before. (look at table 8 and figure 29)

167
Lecture Notes

168
 price
S S1

price S S1
25 A A1
25 7 9
20
B B1
20 6 8 15
C C1
15 5 7 10
D D1
10 3 6
5 E1
E
5 0 4 0
1 2 3 4 5 6 7 8 9 Quantity
supplied
Figure (29): change in supply
Table (8): Supply schedule

169
Lecture Notes

170
Changes in supply, whether increases or decreases, can occur for
several reasons (determinants of supply): cost of resources,
productivity, technology, taxes and subsidies, expectations,
government regulations and the number of sellers.

A change in the cost of productive inputs such as land, labor, and

capital can cause a change in supply.

If the price of the inputs drops, producers are willing to produce

more of a product, thereby shifting the supply curve to the right.

If labor or other costs rise, producers would not be willing to

produce as many units. Instead, they would offer fewer products
for sale, and the supply curve would shift to the left.

171
Productivity goes up whenever more output is produced using the
same amount of input.

When management trains or motivates its workers,

productivity usually goes up. Productivity should also go up if
workers decide to work harder or more efficiently. In each
case, more output is produced at every price, which shifts the
supply curve to the right.

If workers are unmotivated, untrained, or unhappy, then

productivity could decrease. The supply curve then shifts to the
left because fewer goods are produced at every possible price.

172
New technology tends to shift the supply curve to the right. The
introduction of a new machine or a new chemical or industrial process
can affect supply by lowering the cost of production or by increasing
productivity.

When production costs go down, the producer is usually able to

produce more goods and services at all possible prices in the market.

Firms view taxes as a cost of production, just as they do raw materials

and labor.

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Lecture Notes

174
 If a company pays taxes, the cost of production goes up. This
causes the supply curve to shift to the left.

If taxes go down, then production costs go down as well. When

this happens, supply normally increases and the supply curve
shifts to the right.

A subsidy is a government payment to an individual, business, or other

group to encourage or protect a certain type of economic activity.

Subsidies lower the cost of production, encouraging current

producers to remain in the market and new producers to enter,
then the supply curve shifts to the right.

When subsidies are repealed, costs go up, producers leave the

market, and the supply curve shifts to the left.

175
Expectations about the future price of a product can also affect supply.

If producers think the price of their product will go up, they

may make plans now to produce more later on. When the new
production is ready, the market supply curve will increase, or
shift to the right.

If producers expect lower future prices, they may try to produce

something else or even stop producing altogether—causing the
supply curve to shift to the left.

176
 When the government establishes new regulations, the cost of
production can change, causing a change in supply.

Increased—or tighter— government regulations restrict supply,

causing the supply curve to shift to the left.

Relaxed government regulations allow producers to lower the

cost of production, which results in a shift of the supply curve to
the right.
EX.
when the government requires new auto safety features such as air bags
or emission controls, cars cost more to produce. Producers adjust to the
higher production costs by producing fewer cars at every possible price.

177
Lecture Notes

178
 As more firms enter an industry, the supply curve shifts to the
right because more products are offered for sale at the same
prices as before. In other words, the larger the number of
suppliers, the greater the market supply.

if some suppliers leave the market, fewer products are offered

for sale at all possible prices. This causes supply to decrease,
shifting the curve to the left.

All of the factors we have discussed, except the last one, can
Note cause a change in both the individual and the market supply
curves. However, a change in the number of suppliers can cause
the market supply curve to shift to the right or left.

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Lecture Notes

180
 Supply shifts to lift (decrease) if: Supply shifts to right (increase) if:
If the price of the inputs goes up If the price of the inputs drops
Decrease productivity Increase productivity
Technology backwardness Improvements in technology
Increase taxes & decrease subsidies Decrease taxes & increase subsidies
If producers expect lower future prices If producers expect higher future prices
Tighter government regulations Relaxed government regulations
the smaller the number of suppliers the larger the number of suppliers
S3 Table (9): change in Supply
price S1 S2

Quantity supplied
Figure (30): change in Supply
181
 Costs of
Resources

Number of Productivity
Sellers

Change in
Supply
government Technology
Regulations

Taxes &
Expectations Subsidis

Figure (31): factors affecting on supply

demand
182
 Elasticity of Supply

A measure that shows how a change in quantity

Supply Elasticity
supplied responds to a change in price.

The extent to which a change in price causes a

OR change in the quantity supplied.

When the price of an item changes, the change

OR
in quantity supplied can vary a little or a lot.
Note

There is very little difference between supply and demand elasticities. If quantities of
a product are being purchased, the concept is demand elasticity. If quantities of a
product are being brought to market for sale, the concept is supply elasticity. In both
cases, elasticity is simply a measure of the way quantity adjusts to a change in price.

183
Lecture Notes

184
 Price elasticity of supply =
If price increase from 10 to
Percentage change in quantity supplied 12, this led to increase
Percentage change in price
quantity from 4 to 5, then:

Δ𝑄 Δ𝑃 𝑄 2 –𝑄 1 𝑃1
= ÷ E= x
Q P 𝑃 2 − 𝑃1 𝑄1
Δ𝑄 𝑃 5−4 10
= ÷ = x
Δ𝑃 Q 12−10 4

=
𝑄 2 –𝑄 1
x
𝑃1 = 1.25
𝑃 2 − 𝑃1 𝑄1
elastic supply

185
Lecture Notes

186
 There are five degrees for elasticity of supply

price
S

10

When a given change in price does not

5
cause any change in quantity supplied.
Ex. Mona Lisa painting by Leonardo da Vinci.
4 Quantity supplied

Figure (32): Perfectly Inelastic Supply

187
Lecture Notes

188
 S
price

10

In this case, a change in price causes a

proportionally smaller change in quantity 5

supplied. When the price doubles from $5 to

$10, the quantity brought to market goes up Quantity Supplied
4 6
only 50 percent, or from four units to six units.
Figure (33): Inelastic Supply

price
S

10
Here a change in price causes a proportional 5
change in the quantity supplied. As the price
doubles from $5 to $10, the quantity brought
to market also doubles. 8 Quantity supplied
4

Figure (34): Unit Elastic Supply

189
Lecture Notes

190
 price

S
When the change in price causes a 10

proportionally larger change in quantity

supplied. Doubling the price from $5 to $10 5

causes the quantity brought to market to

triple from four to twelve units.
4 12 Quantity
Supplied
Figure (35): Elastic Supply
price

When even a tiny increase or reduction in the

price will lead to very large changes in the P S

quantity supplied, so that the price elasticity

of supply is infinite. Quantity
Q1 Q2
Supplied
Figure (36): Perfectly Elastic Supply

191
Lecture Notes

192
Unlike demand elasticity, the number of substitutes has no bearing on
supply elasticity. In addition, neither the ability to delay the purchase nor
the portion of income consumed are important. Instead, only production
considerations determine supply elasticity.

The elasticity of a producer’s supply curve depends on the nature of its

production.

If a firm can adjust to new prices quickly, then supply is likely to

be elastic.

If the nature of production is such that adjustments take longer,

then supply is likely to be inelastic.

193
 If a firm can react quickly to a changing price, then supply is likely
to be elastic.

If the firm takes longer to react to a change in prices, then supply

is likely to be inelastic.

The supply curve for nuclear power is likely to be inelastic in the short run. No matter
what price is being offered, electric utilities will find it difficult to increase output
because of the huge amount of capital and technology needed before nuclear
production can be increased.

The supply curve is likely to be elastic for many toys, candy, and other products that can
be made quickly without huge amounts of capital and skilled labor. If consumers are
willing to pay twice the price for any of these products, most producers will be able to
gear up quickly to significantly increase production.

194