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
2
LAW OF SUPPLY
A direct relationship exists between
price and quantity supplied
 As
Price Rises…
…Quantity Supplied Rises
 As
Price Falls…
…Quantity Supplied Falls
3
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.
11
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
12
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
13
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
14
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
15
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
16
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

17
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)
18

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
19
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
20
DETERMINANTS OF SUPPLY






Resource Prices
Technology
Taxes & Subsidies
Prices of Other Goods
Price Expectations
Number of Sellers
21
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
22
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.
23
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
24
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
25
26