Transcript Law Of Supply

LAW OF SUPPLY
- P.Bharathi
SUPPLY DEFINED
Good A
P QS
Supply schedule is a table
that shows the amount of goods
the producers are willing to
supply a different price
levels
Rs1
2
3
4
5
5
20
35
50
60
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LAW OF SUPPLY
A direct relationship exists between
price and quantity supplied
 As
Price Rises…
…Quantity Supplied Rises
 As
Price Falls…
…Quantity Supplied Falls
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SUPPLY CURVE
Price
Supply
Schedule
P
Rs.5
P QS
4
Rs.5
4
3
2
1
3
2
1
o 5 10
20 30 40 50 60 70 80
Quantity
Q
60
50
35
20
5
4
SUPPLY CURVE
Price
Supply
Schedule
P
Rs5
P QS
4
Rs.5
4
3
2
1
3
2
1
o
10 20 30 40 50 60 70 80
Quantity
Q
60
50
35
20
5
5
SUPPLY CURVE
Price
Supply
Schedule
P
Rs.5
P QS
4
Rs.5
4
3
2
1
3
2
1
o
10 20 3035 40 50 60 70 80
Quantity
Q
60
50
35
20
5
6
SUPPLY CURVE
Price
Supply
Schedule
P
Rs.5
P QS
4
Rs.5
4
3
2
1
3
2
1
o
10 20 30 40 50 60 70 80
Quantity
Q
60
50
35
20
5
7
SUPPLY CURVE
Price
Supply
Schedule
P
Rs.5
P QS
4
Rs.5
4
3
2
1
3
2
1
o
10 20 30 40 50 60 70 80
Quantity
Q
60
50
35
20
5
8
SUPPLY CURVE
Price
P
Supply
Schedule
S
Rs.5
P QS
4
Rs.5
4
3
2
1
3
2
1
o
10 20 30 40 50 60 70 80
Quantity
Q
60
50
35
20
5
9
SUPPLY CURVE
Supply
Schedule
Price
P
S
Rs.5
P QS
4
Rs.5
4
3
2
1
3
2
1
o
10 20 30 40 50 60 70 80
Quantity
Q
60
50
35
20
5
10
.
Price increases; QS increases
Price decreases; QS decreases
Direct
“S” refers to the “whole supply curve” and refers to what
producers will supply at “different prices”
“QS” refers to a “point on the curve” and refers to what
producers will supply at a “particular price”
S
P2
P1
QS1
QS2
Reasons for direct relationship
1. There is increasing opportunity cost if you don’t produce.
2. Current producers produce more
3. New producers are attracted to the market.
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SUPPLY CURVE
Price
P
Supply
Schedule
S
Rs.5
P QS
4
Rs.5
4
3
2
1
3
2
1
o
10 20 30 40 50 60 70 80
Quantity
Q
60
50
35
20
5
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SUPPLY CURVE
Price
P
Rs.5
4
Increase
in
Supply
S
S’
Supply
Schedule
P QS
Rs.5
4
3
2
1
3
2
Increase
in Quantity
Supplied
1
o
10 20 30 40 50 60 70 80
Quantity
Q
60 80
50 70
35 60
20 45
5 30
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Changes in Supply and in Quantity Supplied
Price
Entire supply curve shifts
rightward when:
• price of input ↓
• price of alternate good ↓
• number of firms ↑
• expected price ↑
• technology advances
• favorable weather
S1
S2
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Quantity
SUPPLY CURVE
Price
Decrease
P
in
Rs.5
Supply
S’
Supply
Schedule
S
P QS
4
Rs.5
4
3
2
1
3
2
1
o
Decrease
in Quantity
Supplied
10 20 30 40 50 60 70 80
60 45
50 30
35 20
20 0
5 --
Q
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Quantity
Changes in Supply and in Quantity Supplied
Price
Entire supply curve shifts
leftward when:
• price of input ↑
• price of alternate good ↑
• number of firms ↓
• expected price ↓
• unfavorable weather
S2
S1
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Quantity
Factors that Shift the Supply Curve
Input prices
• A fall (rise) in the price of an input causes an
increase (decrease) in supply, shifting the
supply curve to the right (left)
 Price of Related Goods
• When the price of an alternate good rises
(falls), the supply curve for the good in
question shifts leftward (rightward)
 Technology
• Cost-saving technological advances increase
the supply of a good, shifting the supply curve
to the right

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Factors that Shift the Supply Curve
Number of Firms
• An increase (decrease) in the
number of sellers—with no other
changes—shifts the supply curve to
the right (left)
 Expected Price
• An expectation of a future price
increase (decrease) shifts the
current supply curve to the left
(right)
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
Factors that Shift the Supply Curve

Changes in weather
• Favorable weather
• Increases crop yields
• Causes a rightward shift of the supply curve for
that crop
• Unfavorable weather
• Destroys crops
• Shrinks yields
• Shifts the supply curve leftward

Other unfavorable natural events may effect
all firms in an area
• Causing a leftward shift in the supply curve
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Shift in the Supply Curve
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
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DETERMINANTS OF SUPPLY






Resource Prices
Technology
Taxes & Subsidies
Prices of Other Goods
Price Expectations
Number of Sellers
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ELASTICITY OF SUPPLY

Elasticity of supply measures the relationship
between change in quantity supplied and a change
in price.

Formula:
Percentage Change in
Quantity
Supplied
Es 
Percentage Change in Price
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ELASTICITY OF SUPPLY
(1) When supply is elastic, producers can
increase production without a rise in cost or a
time delay
(2) When supply is inelastic, firms find it hard to
change their production levels in a given time
period.
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Determinants of Supply Elasticity

Factor substitution possibilities
• Factor substitutability with a change in demand
• Factor substitution at low cost
• When factors are highly specialized,
substitution may be harder and thus supply
will be inelastic

Availability of excess production capacity
• When there is spare capacity, businesses can
expand output easily to meet rising demand
without upward pressure on costs
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Determinants of Supply Elasticity



Stocks (inventories) available to meet demand
• A low level of stocks makes supply inelastic in
the short term
• When stocks can be released onto the market,
supply is elastic
The time frame allowed
• Momentary period (fixed supply)
• Short run (inelastic supply)
• Long run (elastic supply)
Artificial limits on supply
• E.g. the impact of patents that limit which firms
can supply a product
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