Supply and Price Determination
Farid Abolhassani
Learning Objectives
After working through this chapter, you will be able to:
 List the factors which influence the supply of a product
 Show graphically how changes in supply factors
influence supply
 Explain how price is determined by the forces of supply
and demand
 List some advantages of markets as a method of resource
allocation
 Give examples of health care markets
 Describe the consequences of price regulation, subsidies
and indirect taxation by the government
Key Terms
Market equilibrium: A situation where the price in a given
market is such that the quantity demanded is equal to the quantity
supplied.
Operational (technical, productive) efficiency: Using only
the minimum necessary resources to finance purchase and deliver
a particular activity or set of activities (i.e. avoiding waste).
Quantity supplied: The amount of a good that producers plan to
supply at a given price during an identified period.
Subsidy: A payment made by the government to a producer or
producers where the level of payment depends on the exact level
of output.
Supply curve: A graph showing the relationship between the
quantity supplied of a good and its price when all other variables
are unchanged.
Supply (Definition)
If a firm supplies a good or a service, the firm
1. Has the resources and technology to produce it,
2. Can profit from producing it, and
3. Plans to produce it and sell it.
Quantity Supplied
The amount that producers
 Plan to sell
 During a given time period
 At a particular price.
The Law of Supply
Other things remaining the same, the
higher the price of a good, the greater is
the quantity supplied; and the lower the
price of a good, the smaller is the
quantity supplied
Supply Curve
PPF and Marginal Cost
Supply Schedule
Marginal Cost/Revenue (Pounds per disc)
Marginal Cost / Revenue
A Change in the Quantity Supplied versus a
Change in Supply
Determinants of Supply
1. The prices of factors of production
2. The prices of related goods produced
3. Expected future prices
4. The number of suppliers
5. Technology: the way that factors of production are
used to produce a good
Related Goods from Production Point
of View
 Substitutes: Goods that can be produced
by using the same resources
 Complements: Goods that must be
produced together
A Change in the Quantity Supplied versus a
Change in Supply
• The prices of factors of production 
• The prices of substitute goods 
•The prices of complement goods 
• Expected future prices 
• The number of suppliers 
• Technology 
Market Equilibrium
The Effects of a Change in Demand
The Effects of a Change in Supply
The Effects of an Increase in Both
Demand and Supply
Example:
• Provider
induced demand
• Growth of
cosmetic surgery
Consequences of Price Ceiling
 Waiting lists
 Under-the-table charges
Price Ceiling
 Charges for hidden extras
 Diminished quality
Consequences of Minimum Wage
 Reduction of the number of
receptionists employed
 Reduction of the number of paid
hours.
Minimum Wage
 Imposing search costs on individuals
seeking receptionist work.
 Worsening working conditions for
those who are able to retain their
positions e.g. being expected to work
longer hours without additional pay.
 Some employers may illegally
continue to pay wages that are below
the minimum wage.
 Provision of fewer services due to
increased cost
Subsidies
Consumer’s benefit of subsidy
Producer’s benefit of subsidy
Demand Responsiveness to Price and
Subsidies
High Responsiveness
Low Responsiveness