CHAPTER 2-THEORY OF SUPPLY.pptx

Definition of Supply : The different quantities of a
good or service sellers are willing and able to
produce and offer to sell at different prices in a
given period of time.
Individual supply : The relationship between the
price of a good and the quantity supplied by a
single seller.
Market supply: The sum of all the quantities
supplied by all sellers in the market for a particular
good or service at a given price and period of time
DEFINITION & CONCEPT

The law of supply states that the higher the price
of a product ,the greater the quantity supplied of
that product and the lower the price of a product,
the lower the quantity supplied, ceteris paribus.
Example: if the price of chicken increases, the
quantity of chicken supplied will increase since the
seller will sell more profit.
LAW OF SUPPLY

Assumptions:
1. Cost of production remain constant
2. Number of sellers remain the same
3. Price of related goods (complements or substitutes)
does not change.
4. Availability of other inputs remain unchanged.
Based on the law of supply, a positive relationship exists
between price & the quantity supplied.
P↑ Qs ↑
P↓ Qs ↓
LAW OF SUPPLY

 The supply function illustrated the relationship
between quantity supplied and price as a
mathematical equation. Generally, the supply
function is :
Qs = c + dP
Where ,
Qs = quantity of goods supplied (units)
c = quantity of goods supplied when the price P is zero.
‘+’ = positive sign that indicates the direct relationship
between price & the quantity supplied.
P = Price of the goods (RM)
SUPPLY FUNCTION

The supply function is Qs = 15 + 3P. Calculate the quantity of goods
to be supplied at different price levels by completing the
following table :
SAMPLE 1
P (RM) Qs (units)
1
2
3
4

Solution
C = 15, d = 3
Therefore,
At P = RM1
Qs = 15 + 3(1)
= 15 + 3
= 18 units
At P = RM2
Qs = 15 + 3(2)
= 15 + 6
= 21 units
At P = RM3
Qs = 15 + 3 (3)
= 15 + 9
= 24 units
At P = RM4
Qs = 15 + 3(4)
= 15 + 12
= 27 units
SAMPLE 1

Two ways to form the supplied function are:
a) with the formula P-P1 = (P2-P1) / (Q2-Q1) X (Q-Q1)
b) Using simultaneous equation
The following table shows the quantity supplied of goods at
various price levels. Find the supply function.
SAMPLE 2
P (RM) Qs (units)
1 20
2 24
3 28
4 32

Using the formula:
From the table we take P1 =1 and Q1 = 20
P2 = 2 and Q2 = 24
Substitute the value of P1, Q1 and P2, Q2 into the formula
P-P1 = (P2-P1) / (Q2-Q1) X (Q-Q1)
P -1 = (2-1) / (24 -20) X (Q-20)
P – 1= (1) /(4) X (Q-20)
4(P-1) = (Q-20)
4P -4 = Q-20
4P -4+20 = Q
Q = 16 + 4P
Solution 1 ( by formula)

Using simultaneous equation :
Qs = C + dP
20 = c + 1d …….. (1)
24 = c + 2d …….. (2)
Equation(1) minus equation (2)
-4 = -d
Therefore,
d = 4
Substitute d = 4 into equation (1)
20 = c + 1(4)
20 = c + 4
C = 20 -4
c = 16
We now know d= 4, c=16.
Substitute the value to the
supply function form Qs = c + dP
Hence,
Qs = (16) + (4)P
Qs = 16 + 4P
Solution 2 ( simultaneous equation)

Supply Schedule
Supply schedule is a list or table of
different amounts of the good that
producers are both willing and able to
offer for sale at various prices during a
particular period of time.
Source: Relationship between Price and the Quantity of Good X supplied (Normala
Ismail,2008, p.110)
Supply Curve
A curve showing the different
quantities supplied for a good at
different prices in a given period of
time, ceteris paribus.
Source: The Supply Curve (Normala Ismail,2008,p. 111)

Market Supply Schedule
A table showing the quantity supplied for
a good by all sellers in the market.
It is derived by adding the quantities
supplied each price.
Source: Deriving a Market Supply Schedule and a Market Supply Curve
(Roger 2011, pg. 67)
Market Supply Curve
A market supply curve shows the price-
quantity relationship of good for all sellers.
It is derived by adding up horizontally the
individual supply curves.
Source: Deriving a Market Supply Schedule and a Market Supply Curve
(Roger 2011, pg. 67)

A CHANGE IN QUANTITY SUPPLIED Versus
A CHANGE IN SUPPLY
 due to changes in the price
of the product; other factors
are constant
 a movement between points
along a stationary supply
curve, ceteris paribus.
Changes in quantity supplied Changes in Supply
 due to changes in other
factors but price remains
constant.
 the supply curve shifts so
that different quantities
correspond to each of the
possible prices.

A CHANGE IN QUANTITY SUPPLIED Versus
A CHANGE IN SUPPLY
Changes in quantity supplied
Source: Pragati Ghosh (2016)
An upward movement (from point A to point B) along the
supply curve SS is due to a rise in price of a good and
quantity supplied increase. It is called expansion of supply.
A downward movement (from point A to point C) along the
supply curve SS is due to a fall in price of a good and
quantity supplied also decrease. It is called contraction of
supply.
Changes in Supply
Source: Pragati Ghosh(2016)
A rightward shift of the supply curve from SS to S1S1 is
an increase in supply.
A leftward shift of the supply curve d from SS to S0S0
is a decrease in supply.

DETERMINANTS OF SUPPLY
1. Price of related goods - the supply of a
product can be influenced by the price of
related goods:
 Substitute goods – supply of product will
decrease when there is increase in the
price of a substitute product, e.g. Pepsi &
Coca Cola. If the price of Pepsi increase,
the quantity supplied for Pepsi will
increase ( as per law of supply) and the
quantity of Coca Cola will decrease.

 Complementary goods – increase in the price
of a product will increase the supply of the
complementary goods. E.g., pen & ink.
 when the P of pen increases, the supply for
P increases ( as per law of supply) and the
supply of ink will also increase, since they
are complementary goods.
P pen ↑ Qs pen ↑ SS ink ↑

2. Cost of production
 when cost of production increases, the
quantity supplied will decrease & vice versa.
 Example: increase in wage of labour & price
of capital equipment in the production of
DVDs, will increase the cost of production &
thus reduce the supply of DVDs.

3. Expectation about future prices
 the higher the expected future price of the
product, the smaller the current supply of the
product, and vice versa.
 Example: when government announce
increase in the price of sugar, the current
supply will decrease because the suppliers
want to gain higher profit with new higher
price.

4. Technological advancement
 new technologies enable producers to use
fewer factors of production which will
lower the cost of production and increase
supply.
 Example: when new technology
introduced to harvest paddy, the supply of
rice increased.

5. Number of sellers
 The larger number of firms supplying a
product, the larger the quantity supplied
for the product, vice versa.
 Example: if there is an increase in the
number of cafeteria in a campus, the
supply of food and drinks will increase.

6. Government policies:
 Taxes : decrease the supply of goods &
services
 subsidies : increase the supply
7. Improvements in infrastructure
 improvements in infrastructure such as
transportation and communication will
facilitate free & fast movement of goods &
services within the country. This increases
the supply of product.

8. Speculation
 if producers predicts that the price will
increase in the future, they will reduce the
current supply so as to be able to produce
the goods at the higher price in the future.
9. Weather
 Weather conditions such as storms, winds,
and floods will affect the supply of goods
from certain industries such as agriculture &
fishing.

PRODUCERS GOALS & EXPECTATION
1. The goal of a producer will influence quantity
of supply. A producer may aim to maximize
profits or production .
2. If the goal of a producer is to maximize
production, he/she will supply goods in higher
quantities compared to a producer who wishes
to maximize profits.
3. As in the case of demand, expectations can
play an important role in supply decisions.

 Exceptional supply occurs when it is not conform to
the law of supply.
 It shows an inverse relationship between price and
quantity supplied. The price of product increases
and the quantity supplied decreases.
 The supply curve slopes downward from left to right.
 Example : Supply of labour.
 The backward-bending labour supply curve occurs
when an even higher wage actually entices people
to work less and consume more leisure or unpaid
time.
EXCEPTIONAL (ABNORMAL) SUPPLY
(Backward-Slopping Supply Curve)

EXCEPTIONAL (ABNORMAL) SUPPLY
(Backward- bending Supply Curve)
 As the wage rate rise from W0 to W1 the worker
decides to work long hours from OL0 to OL1.
However, if the wage rate increased above W1 ,
the number of hours offered to work for pay
would fall . If the wage rate increased from W1
to W3, the number of hours offered to work for
pay would fall from 0L1 to 0L3. This is
represented by a backward-sloping supply curve
as under.
 The backward bending supply curve indicating
that initially the supply of labour is directly
related to wage, but after a particular limit of
wage level, the supply of labour becomes
inversely related to wage. Workers normally
prefer leisure after reaching certain amount of
wage level.
Source: Sanket Suman (2016)

1.
2.
3.
Hashim Ali (1998). Comprehensive Economics Guide. Singapore. Oxford University Press Pte. Ltd.
Irvin B. Tucker (2008). Economics for Today’s World (5th Ed.). International Student Edition. Thomson
South-Western.
Normala Ismail (2008). Micro Economics (ECO162). Institut Perkembangan Pendidikan, Universiti
Teknologi MARA, UiTM. Shah Alam
4. Rodney H. Mabry & Holley H. Ulbrich (1989). Introduction to Economic Principles. International Edition.
Singapore. McGraw-Hill.
5. Roger A. Arnold (2011). Principles of Economics, (10th Ed). South-Western . Cengage Learning International
Edition.
6. Pragati Ghosh (2016). Difference between “change in quantity supplied” and “change in supply”.
Retrieved from http://www.shareyouressays.com/115719/difference-between-change-in-quantity-
supplied-and-change-in-supply
7. Sanket Suman. (2016). Top 6 Theories of Wages (With Diagram).
Retrieved from http://www.economicsdiscussion.net/theories-of-wages/top-6-theories-of-wages-
with-diagram/12634
REFERENCES

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