SUPPLY
Supply
 Supply may be defined as the quantity of a good that
producers wish to produce and sell over a period of
time at a given price, other things being equal.
 It therefore depicts a relationship between quantity
supplied and price.
Laws of Supply
 Ceteris Paribus, a greater quantity will be supplied at a
higher price, because at a higher price costs can be
covered.
 At lower prices less will be supplied.
 The relationship between price and quantity supplied
is therefore said to be a positive one.
Supply Schedules
 This shows the relationship between quantity supplied
of a product and the price of the product, other things
being equal.
Price in $
1
2
3
4
5
6
Quantity Supplied
10
20
30
40
50
60
Supply Curve
 This is a graphical representation of the supply
schedule.
 It shows the relationship between quantity supplied
and price.
 The positive slope indicates that as price increases,
quantity supplied also increases.
 Slopes upwards from left to right
Supply Curve
Determinant of Supply
 There is only one determinant of supply and that is its
price. As such changes in price leads to a movement
along the supply curve.
 Price: increases in price of a product, assuming ceteris
paribus, would lead to more being supplied, because at
a higher price firms can cover their variable costs.
 As such there is a movement from one point to the
next (contraction/ expansion)
A movement along the Supply Curve
Conditions of Supply
 These causes a shift of the entire supply curve,
resulting from a fall/ increase in supply.
 Price of inputs or factors of production: inputs are the
materials such as labor and machinery that are used to
produce outputs.
 As the price of these materials, assuming ceteris
paribus, increase so to does the firms cost of
production, this leads to a decrease in profits.
Conditions of Supply
 Therefore firms would produce and offer fewer
products for sale.
 A rise in price of inputs causes a leftward shift of the
supply curve.
 A fall in the price of inputs causes a rightward shift of
the supply curve.
 This occurs as the cost of production falls.
A Leftward shift of the Supply Curve
A rightward shift of the Supply Curve
Conditions of Supply
 Technology: at any given point in time, what is
produced and how it is produced depends on our
technological know how.
 Advancements in technology that decreases the costs
of production will lead to increases in profits and
would lead to a rightward shift of the supply curve.
 This shift indicates, producers increased willingness to
produce and sell more at every given price.
Conditions of Supply
 Number of suppliers: for any given set of prices and
technology, how much is supplied depends upon the
number of firms producing that product and putting it
on the market for sale.
 An increase in the number of suppliers will shift the
supply curve to the right; conversely a decrease would
shift the curve to the left.
Market Supply Curves
 To determine the market supply curve, we simply add
the quantities of each individual firm at each given
price.
 The market supply curve is an aggregation of the
individual firms supply curves.
Market Supply Curves
Elasticity of Supply
 This measures the degree of responsiveness of
quantity supplied to changes in the price of products.
Es = % ∆ in Qs
% ∆ in P
OR
∆ Qs * P
Qs
∆P
Categories
 Elastic: Es > 1
 Changes in quantity supplied are more than responsive
to changes in price, all other things remaining constant.
 Inelastic: Es < 1
 Changes in quantity supplied are less than responsive to
changes in price, all other things remaining constant.
Categories
 Unit Elasticity: Es = 1
 Changes in quantity supplied are proportionate to the
changes in price, assuming ceteris paribus.
Determinants
 Time: In the long run elasticity of supply may be
greater, because firms can react to price changes.
 Entrepreneurial risk taking: the more that investors
are willing to risk, by producing more goods and
services, the greater the elasticity.
Determinants
 Production process constraints: some firms face limits
on what they can produce, in some instances large
factories may be needed to produce the goods and
services, therefore suppliers may not be able to quickly
increase/ decrease their production of goods and
services as price changes.
Exercise
 Explain the difference between a change in quantity
supplied and a change of supply.
 Distinguish between a movement along the supply
curve and a shift of the supply curve.
 Discuss the effects of a hurricane/ natural disaster on
the production of sugarcane in the Caribbean.