SUPPLY CONCEPTS
SUPPLY
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The quantities that a seller is willing and able to sell at different prices.
Indicates how much of a good producers are willing and able to sell per period at each price,
other things constant.
LAW OF SUPPLY
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“Ceteris paribus”, as the price of a commodity rises, its quantity supply increases, and as the
price falls, its quantity supply decreases.
states that the quantity supplied is directly or positively related to its price , other things
constant
thus, the lower the price, the smaller the quantity supplied; the higher the price, the greater the
quantity supplied
THE SUPPLY CURVE
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With demand, consumers try to maximize their utility. Withsupply, producers try to maximize
profit.
Think as if you are one of the producers like Jollibee,Petron, Samsung, and Apple. How do you
feel? Would youstill like the feeling of being its consumers?
As we go along this lesson, you will now develop anunderstanding of supply and supply curve.
Remember that,
Profit = Total Revenue – Total Cost
Profit = (P)(Q) – Total Cost
When:
TR = TC: a firm breaks even
TR > TC: a firm continues operating
TR < TC: a firm fails; shut down
SUPPLY SCHEDULE AND SUPPLY CURVE
Supply Schedule- is a table showing how much of a product
firms will supply at different prices
Supply Curve- a curve or line, showing the quantities of
a particular good supplied at various prices during a given time
period, other things constant
Given the supply schedule below, plot the supply curve.
Price of
Pizza (Per
slice P)
150
120
90
60
30
Quantity
Supplied per
week (million)
28
24
20
16
12
QUANTITY SUPPLIED VS. SUPPLY
Quantity Supplied (Qs)
- refers to the amount offered for sale at a specific price, as shown by a point on a given supply curve
Supply (S)
- the entire relation between the price and quantity supplied, as shown by the entire supply schedule or
supply curve
Quantity Supplied vs. Supply
INDIVIDUAL SUPPLY VS. MARKET SUPPLY
Individual Supply- the supply from an individual producer
Market Supply- the supply from all producers in the market for that good
Consider the data below:
Price per Pizza (P)
P 90
P 120
Now let’s plot the curves for each producer:
Then, plot the market supply curve…
Quantity Supplied of Pizza per Produce
Yellow Cab
Shakey’s
400
300
500
400
THE PROFIT MOTIVE
When the market price rises following an increase in demand, it becomes more profitable for businesses
to increase their output.
PRODUCTION AND COSTS
When output expands, a firm's production costs tend to rise, therefore a higher price is needed to cover
these extra costs of production. This maybe due to the effects of diminishing returns as more factor
inputs are added to production.
NEW ENTRANTS COMING INTO THE MARKET
Higher prices may create an incentive for other businesses to enter the market leading to an increase in
total supply.
ELASTICITY OF SUPPLY
a measure of the responsiveness of quantity supplied to a price change; the percent change in quantity
supplied divided by the percent change in price
Example: If the market price increases from ₱90 to ₱120,the quantity of pizza supplied increases from
20 pieces to24 pieces. Compute for the elasticity of supply of pizza.
CATEGORIES OF SUPPLY ELASTICITY
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If supply elasticity exceeds 1, supply is elastic.
If supply elasticity equals 1, supply is unit elastic.
If supply elasticity is less than 1, supply is inelastic
Elasticity – Supply Curves
ELASTICITY OF SUPPLY
Inelastic -> flatter (parallel to X-Axis)
Elastic -> steeper (parallel to Y-Axis)
DETERMINANTS OF SUPPLY
1.
2.
3.
4.
5.
The cost of resources used to make the good
The price of other goods
The technology used to make the good
Producer expectations
The number of sellers in the market
DETERMINANTS OF SUPPLY
1. Change in the Cost of Resources
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an increase in the cost of a resource will reduce
the supply of a good; a decrease in the cost of
a resource will increase the supply of a good
e.g. a decrease in the cost of cheese increases the
supply of pizzas (rightward shift)
2. Change in the Prices of other Goods
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a change in the price of other goods affects the opportunity cost of making the good (the
subject matter)
e.g. if the price of spaghetti declines, the opportunity cost of making pizza declines, so pizza
production becomes relatively attractive (rightward shift of the supply curve of pizza)
3. Change in Technology
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lowers the cost of producing goods, thus making markets more profitable
e.g. a new model of oven which can bake pizzas in half the time as existing ovens could, thereby
shifts the supply curve of pizzas rightward
4. Change in Producer Expectations
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any change that affects producer expectations about profitability can affect market supply
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e.g. if rice producers expect the price to increase in the future, some may expand their
production capacity now
e.g. expecting higher crude oil prices in the future might prompt some producers to reduce their
current supply while awaiting the higher price
5. Change in the Number of Sellers
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market environment can affect the number of suppliers in the market
e.g. government strictly regulating the prices and entry of new firms in a variety of industries,
thereby limiting the production of goods by these firms- e.g. taxation could also shift the supply
curve
SUPPLY CURVE BEHAVIORS
EXPANSION (movement along)
CONTRACTION (movement along)
EXCEPTIONS
A. In an auction, goods are sold away whatever the bid. Itis possible that the seller is badly in need of
money and wants a certain amount of it. As soon as that amount is made up, he will refuse to sell more.
The higher the price, the smaller the quantity he will need to sell in order to get the required amount. It
is also possible that a person wants to get rid of a quantity of goods as in the case of a person going
abroad. In such a case, he will sell away all that he has, whatever the price offered.
B. When a further heavy fall in price is expected, the sellers may become panicky. They will sell more
even if the price falls.
EXTENSION AND CONTRACTION, i.e. MOVEMENT ALONG THE SUPPLY CURVE:
When the quantity offered for sale increases ordecreases merely because price has risen or fallen,we
use the terms extension and contraction ofsupply. The supply schedule is the same and wetravel up and
down the same supply curve
MOVEMENT ALONG THE SUPPLY CURVE vs. SHIFT OF THE SUPPLY CURVE
Movement along the Supply Curve
- caused by changes in price, other things
constant, changing the quantity supplied
INCREASE AND DECREASE, i.e., SHIFT OF THE CURVE
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If, on the other hand, the change in the quantity offered for sale is caused, not by a change in
price, but by a change in the conditions of supply, we say that supply has increased or decreased
or the supply curve has shifted from its previous position.
The change in the condition of supply implies a change in the technical conditions: perhaps a
new process or a new material has been discovered, a new labor-saving device has been
discovered, or raw materials and other factors have become cheaper.
MOVEMENT ALONG THE SUPPLY CURVE vs. SHIFT OF THE SUPPLY CURVE
Shift of the Supply Curve
- caused by a change in one of the determinants
of supply other than the price
MARKET EQUILIBRIUM
When the supply and demand curves intersect, the market is in... EQUILIBRIUM
In equilibrium, quantity demanded and quantity supplied are equal (Qd = Qs).
The corresponding price is the equilibrium price or the market-clearing price, while the quantity is the
equilibrium quantity.
EQUILIBRIUM PRICE AND QUANTITY
In this illustration, demand and supply
curves intersect at P =8, and Q= 40.
In this market, the equilibrium price is ₱ 8 per
unit, while equilibrium quantity is 40units.
Qd = Qs, therefore the market is clear.
Let’s try to compute…
Example 1: Qd = 620 – 5P
Qs = 480 + 10P
Compute for equilibrium quantity (Qd & Qs), equilibrium price (P).
Equilibrium Price and Quantity
Example 2:
Qd = 19 – 2P
Qs = 1 + P
SURPLUES AND SHORTAGE
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If the market price is above the equilibrium price, quantity supplied is greater than quantity
demanded, therefore creating a SURPLUS.
If the market price is below the equilibrium price, quantity supplied is less than quantity
demanded, which creates a SHORTAGE
What happens to price if there is surplus? shortage?
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If a surplus happens, prices must fall to increase quantity demanded and reduce quantity
supplied until the surplus is eliminated.
If a shortage occurs, prices must rise to increase quantity supplied and reduce quantity
demanded until the shortage is eliminated.
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market price is lower than the equilibrium price
Qs < Qd
prices will rise because of shortage
market price of ₱12 is greater than the
equilibrium price of ₱8
Qs (55) > Qd (25), there are excess Qs,
therefore the markets not clear
the price will drop because of this surplus
PRICE CEILING AND PRICE FLOOR
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legally imposed maximum price on the market
transactions above this price is prohibited
government set ceiling price below the market
equilibrium price which they believed is too high
intends to keep stuff affordable for poor people
e.g. rent control
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legally imposed minimum price on the market
transactions below this price is prohibited
government set floor price above the market
equilibrium price which they believed is too low
placed on markets for goods that are an
important source of income for the sellers.
labor market
e.g. minimum wage
CHANGE IN EQUILIBRIUM PRICE AND QUANTITY
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A change in supply, or demand, or both, will
necessarily change the equilibrium price, quantity
or both.
Example 1:10% decrease in producer’s subsidies
25% increase in population
Example 2: Increase in the price of a complement
Example 3: An increase in export of bananas from the Philippines to Florida
- comparing two equilibria