CH # 3

1

MBA (Marketing) Msc (Economics)

Instructor: Bilal KhanInstructor: Bilal Khan

CH # 3

2

SupplySupply

3

TERMS TO KNOW:

Meaning of supply and Law of supply1

Supply schedule and Diagram2

Changes in supply3

Elasticity of Supply4

5 Mathematical explanation of Es

4

Supply and Law of supply:

Supply:Supply means the quantities of a commodity offered for sale at a given price.

Supply is always associated with price i.e. more quantity is offered for sale at higher prices.

Law of supply:“Other things remaining the same, quantity supplied of a commodity increases with rise in price and decreases with fall in price.”

5

The Law of SupplyThe Law of Supply

There is a direct relationship between price and quantity supplied. Quantity supplied rises as price rises, other

things constant. Quantity supplied falls as price falls, other

things constant.

6

The Supply Curve

The supply curve is the graphic representation of the law of supply.

The supply curve slopes upward to the right.

The slope tells us that the quantity supplied varies directly – in the same direction – with the price.

7

S

A

Quantity supplied (per unit of time)

0

Pric

e (p

er u

nit)

PA

QA

A Sample Supply Curve

8

Supply schedule and Diagram:

Law of Supply can be explained with the help of the following schedule and a diagram.

Price of good (X) Quantity supplied (Qs)

20

25

30

35

100

150

180

200

Price

Qs

20

25

30

35

SupplyCurve

100 150 180 200

9

Difference between supply and stock:

Stock: It is the quantity of output which a seller or a

businessman has with him and has not yet been brought for sale:

Supply: It is the quantity of output brought from the

existing stock for sale at a certain price in the market. Example:(1) stock = 1000kg of rice (2) Supply = 200 kg for sale at Afs 40 per kg.

10

Reserve price:

Reserve price: Reserve price is the secret price known

only to the seller or a businessman below which he will not be prepared to under in circumstances.

In other words we can call it a limit, and the seller will not settle for less than this.

11

Determinants of Reserved Price:

(1) Nature of the product: In case perishable product like food etc the reserve

price has got to be low, this is because they must be disposed quickly, however in case of durable products like electrical goods the reserve price can be high, because their supply can be stocked up.

12

Conti…….

(2) Expenditure of stock: Sometimes the producer has his own warehouse to

keep his stock, but there are times when he might have to get one on rent to keep his stock. Therefore he has to incur some expenditure on his stock.

In the previous case his stock of durable goods will enable to put his reserve price high.

As for the latter case the reserve price has to be low because he is paying rent and can not afford to keep his

reserved price high.

13

Conti…..

(3) Future price: If the producer feels that the price of his

product will achieve a higher level in the future, he will put his reserve price high so as to get as much profit as

possible.

14

Conti…

(4) Cost of production: If the marginal cost of production is high, the

average cost will be high and therefore , the price of the product will also be high. In order to avoid a great financial loss, the producer will keep the reserve price high and vice versa.

15

Conti……

(5) Liquidity Preference: If the producer decides that he

needs money quickly for one or other reason, he will keep the reserve price low as this enable him to dispose off the stock quickly and vice versa.

16

Conti….

(6) Arrival of fresh supply: If the arrival of fresh supply is

expected quickly like agricultural products; the reserve has got to be low and in case of durable goods it is generally high.

17

Conti……

(7) Market situation: If there were to be a competition among the

producers in the market as to who would be able to sell more, than the reserve price will be low. However if there were to be monopoly , naturally the reserve price would be high because consumer would have no other alternative.

18

Changes in Supply

The economists classify the changes in supply into two types:

I. Movements along the supply curve (supply changes due to change in price):

II. Shift of the supply curve (changes in supply due to change in other factors)

19

Changes in price causes changes in quantity supplied represented by a movement along a supply curve.

Shifts in Supply Versus Movements Along a Supply Curve

20

If the amount supplied is affected by anything other than a change in price, there will be a shift in supply.

Shifts in Supply Versus Movements Along a Supply Curve

21

Changes in supply.

Changes in supply take place in two ways:1. Extension and contraction of supply.2. Rise and fall or shifting of supply.

Extension and contraction. When the quantity supplied is increased with the increase in price the change in supply is known as extension of supply, and decrease of quantity with decrease in price shows contraction of supply.

Shifting of supply. Another type of change in supply is known as shifting of supply which shows responsiveness or change in quantity supplied to change in other factors not to change in price, such as, change in cost of production, change in technology and so on. Here the price is constant whereas the quantity supplied is increasing or decreasing due to the change in these given factors.

22

Changes in supply through schedule and graph.

Price Qs (Kg.)

5 40

10 60 Y

X0

10

05

20 40 60

P

Qs

a

b

S

SHere the schedule as well as graph show an increase in price from 5 to 10 which leads to increase in quantity supplied from 40 to 60, depicts an extension of supply and vice versa or opposite shows contraction of supply.

exte

nsion

contra

ction

Supply curve

23

Changes in Supply (cont’d):

Movements along the supply curve:

P1

P2

P3

Q1 Q2 Q3 Qs

a

b

c exte

nsion

cont

racti

onPrice

24

Change in quantity supplied (a movement along the curve)

Change in Quantity Supplied

Pric

e (p

er u

nit)

Quantity supplied (per unit of time)

S0

$15A

1,250 1,500

B

25

Shift in supply – the graphic representation of the effect of a change in a factor other than price on supply.

Shifts in Supply Versus Movements Along a Supply Curve

26

Changes in Supply (cont’d):

Shift of the supply curve:

Rise

Fall

Q1 Q2 QsQ0

P1

Price S1 S2

S0

27

Shift in Supply

Pric

e (p

er u

nit)

Quantity supplied (per unit of time)

S0

Shift in Supply(a shift of the curve)

S1

$15A B

1,250 1,500

28

Quantity supplied refers to a specific amount that will be supplied at a specific price.

Shifts in Supply Versus Movements Along a Supply Curve

29

Shift Factors of Supply

Other factors besides price affect how much will be supplied: Prices of inputs used in the production of a

good. Technology. Suppliers’ expectations. Taxes and subsidies.

30

Price of Inputs

When costs go up, profits go down, so that the incentive to supply also goes down.

If costs go up substantially, the firm may even shut down.

31

Technology

Advances in technology reduce the number of inputs needed to produce a given supply of goods.

Costs go down, profits go up, leading to increased supply.

32

Expectations

If suppliers expect prices to rise in the future, they may store today's supply to reap higher profits later.

33

Taxes and Subsidies

When taxes go up, costs go up, and profits go down, leading suppliers to reduce output.

When government subsidies go up, costs go down, and profits go up, leading suppliers to increase output.

34

The Supply Table

Each supplier follows the law of supply.When price rises, each supplies more,

or at least as much as each did at a lower price.

35

From a Supply Table to a Supply Curve

To derive a supply curve from a supply table, you plot each point in the supply table on a graph and connect the points.

36

Individual and Market Supply Curves

The market supply curve is derived by horizontally adding the individual supply curves of each supplier.

37

From Individual Supplies to a Market Supply

Quantities Supplied

ABCDEFGHI

(1)Price

(per DVD)

(2) Ann's Supply

(5)MarketSupply

(4)Charlie'sSupply

$0.000.501.001.502.002.503.003.504.00

012345678

001234555

000000022

013579

111415

(3)Barry's Supply

38

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

From Individual Supplies to a Market Supply

Pric

e pe

r D

VD

Quantity of DVDs supplied (per week)

$4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0

I

H

G

F

E

D

C

BA

Market Supply

39

Elasticity of Supply

Elasticity of Supply:To what extent supply changes as a result of change in price is called elasticity of supply.

The economists presented the following concept of elasticity of supply.

I. Elasticity Less than unity ( Es >1):if % change in supply is less than the % change in price, is called less elastic situation. i.e.

QsPrice

3

4 110

100

100 110Qs

3

4

40

Elasticity of Supply (cont’d):

II. Elasticity equal to unity (Es = 1):if % change in price is equal to % change in supply, the elasticity of supply will be equal to one. i.e.

Price Qs

2

3 150

100

100 150 Qs

2

3

SPrice

41

Elasticity of Supply (cont’d):

III. Elasticity more than unity ( Es > 1):if % change in supply is greater than the % change in price, the elasticity is called more elastic situation. i.e.

Price Qs 2 3

100 200

100 200

2

3

Price

Qs

S

42

Measurement of supply elasticity.

Like demand we can find elasticity of supply through the given formula, if the elasticity is found less than 1 the supply is said to be less elastic and when the elasticity becomes grater than 1, then the elasticity of supply is known as more or high elastic but when it is exactly equal to 1 it means that supply is unitary elastic which shows hundred percent change in quantity supplied to change in price.

43

Mathematical explanation of Es:

The general formula for elasticity of Supply is:

Es = % change in quantity supplied / % change in price

Es = %ΔQs / %ΔP

Es = ΔQs ÷ ΔP Q P

Es = ΔQs × P Q ΔP

44

Supply Schedule:

Points Price(Afs) Supply(Kg)

A 8.00 16

B 8.25 16.5

C 8.50 17

D 8.75 18

E 9.00 18

F 9.25 18.25

45

Measurement Of Elasticity of Supply:

(1)A to B(2)C to D(3)E to F Formula: Es = Change in Qs x price Change in price Quantity

46

Cont…….

(1)A to BEs = 16-16.5 x 8 8-8.25 16Es = 0.5 0.5Es = 01The elasticity of is equal to 1 which shows

that elasticity of supply is unitary.

47

Cont…..

(2)C to D Es = 17-18 x 8.5 8.50-8.75 17Es = 34 17Es = O2Elasticity of supply is equal to 2 which

shows that supply is more than unity:

48

Cont…….

(3)E to F Es = 18.5-18.25 x 9 9-9.25 17 Es = 1 2 Es = 0.5 Hence elasticity of supply is less than

which shows that supply is than unitary:

CH # 3

49