MBA (Marketing) Msc (Economics)

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Instructor Bilal Khan

• MBA (Marketing) Msc (Economics)

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Supply

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TERMS TO KNOW
Meaning of supply and Law of supply
1
Supply schedule and Diagram
2
Changes in supply
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Elasticity of Supply
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5
Mathematical explanation of Es
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Supply and Law of supply

• Supply
• Supply means the quantities of a commodity
  offered for sale at a given price.
• Supply is always associated with price i.e. more
  quantity is offered for sale at higher prices.
• Law of supply
• Other things remaining the same, quantity
  supplied of a commodity increases with rise in
  price and decreases with fall in price.

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The Law of Supply

• There is a direct relationship between price and
  quantity supplied.
• Quantity supplied rises as price rises, other
  things constant.
• Quantity supplied falls as price falls, other
  things constant.

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The Supply Curve

• The supply curve is the graphic representation of
  the law of supply.
• The supply curve slopes upward to the right.
• The slope tells us that the quantity supplied
  varies directly in the same direction with
  the price.

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A Sample Supply Curve
A
PA
QA
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Supply schedule and Diagram

• Law of Supply can be explained with the help of
  the following schedule and a diagram.

Supply Curve
Price
Price of good (X) Quantity supplied (Qs)

35
100
20
30
25
150
25
30
180
20
35
200
Qs
150
100
180
200
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Difference between supply and stock

• Stock
• It is the quantity of output which a
  seller or a businessman has with him and has not
  yet been brought for sale
• Supply
• It is the quantity of output brought
  from the existing stock for sale at a certain
  price in the market.
• Example(1) stock 1000kg of rice
• (2) Supply 200 kg for sale at
  Afs 40 per kg.

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Reserve price

• Reserve price
• Reserve price is the secret
  price known only to the seller or a businessman
  below which he will not be prepared to under in
  circumstances.
• In other words we can call it a limit, and the
  seller will not settle for less than this.

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Determinants of Reserved Price

• (1) Nature of the product
• In case perishable product like food etc
  the reserve price has got to be low, this is
  because they must be disposed quickly, however in
  case of durable products like electrical goods
  the reserve price can be high, because their
  supply can be stocked up.

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Conti.

• (2) Expenditure of stock
• Sometimes the producer has his own
  warehouse to keep his stock, but there are times
  when he might have to get one on rent to keep his
  stock. Therefore he has to incur some expenditure
  on his stock.
• In the previous case his stock of durable
  goods will enable to put his reserve price high.
• As for the latter case the reserve price has to
  be low because he is paying rent and can not
  afford to keep his reserved price high.

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Conti..

• (3) Future price
• If the producer feels that
  the price of his product will achieve a higher
  level in the future, he will put his reserve
  price high so as to get as much profit as
  possible.

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Conti

• (4) Cost of production
• If the marginal cost of production is high,
  the average cost will be high and therefore , the
  price of the product will also be high. In order
  to avoid a great financial loss, the producer
  will keep the reserve price high and vice versa.

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Conti

• (5) Liquidity Preference
• If the producer decides that he needs money
  quickly for one or other reason, he will keep the
  reserve price low as this enable him to dispose
  off the stock quickly and vice versa.

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Conti.

• (6) Arrival of fresh supply
• If the arrival of fresh supply is expected
  quickly like agricultural products the reserve
  has got to be low and in case of durable goods it
  is generally high.

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Conti

• (7) Market situation
• If there were to be a competition among the
  producers in the market as to who would be able
  to sell more, than the reserve price will be low.
  However if there were to be monopoly , naturally
  the reserve price would be high because consumer
  would have no other alternative.

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Changes in Supply

• The economists classify the changes in supply
  into two types
• Movements along the supply curve (supply changes
  due to change in price)
• Shift of the supply curve (changes in supply due
  to change in other factors)

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Shifts in Supply Versus Movements Along a Supply
Curve

• Changes in price causes changes in quantity
  supplied represented by a movement along a supply
  curve.

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Shifts in Supply Versus Movements Along a Supply
Curve

• If the amount supplied is affected by anything
  other than a change in price, there will be a
  shift in supply.

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Changes in supply.

• Changes in supply take place in two ways
• Extension and contraction of supply.
• Rise and fall or shifting of supply.
• Extension and contraction. When the quantity
  supplied is increased with the increase in price
  the change in supply is known as extension of
  supply, and decrease of quantity with decrease in
  price shows contraction of supply.
• Shifting of supply. Another type of change in
  supply is known as shifting of supply which shows
  responsiveness or change in quantity supplied to
  change in other factors not to change in price,
  such as, change in cost of production, change in
  technology and so on. Here the price is constant
  whereas the quantity supplied is increasing or
  decreasing due to the change in these given
  factors.

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Changes in supply through schedule and graph.
Price Qs (Kg.)
5 40
10 60
Supply curve
Y
S
Here the schedule as well as graph show an
increase in price from 5 to 10 which leads to
increase in quantity supplied from 40 to 60,
depicts an extension of supply and vice versa or
opposite shows contraction of supply.
b
10 05
extension
P
a
contraction
S
0
X
20 40 60
Qs
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Changes in Supply (contd)

• Movements along the supply curve

Price
contraction
extension
c
P3
b
P2
a
P1
Q1
Q2
Q3
Qs
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Change in Quantity Supplied
S0
Price (per unit)
15
1,250
1,500
Quantity supplied (per unit of time)
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Shifts in Supply Versus Movements Along a Supply
Curve

• Shift in supply the graphic representation of
  the effect of a change in a factor other than
  price on supply.

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Changes in Supply (contd)

• Shift of the supply curve

S0
Price
S1
S2
Rise
Fall
P1
Q0
Q1
Q2
Qs
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Shift in Supply
S0
15
1,250
1,500
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Shifts in Supply Versus Movements Along a Supply
Curve

• Quantity supplied refers to a specific amount
  that will be supplied at a specific price.

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Shift Factors of Supply

• Other factors besides price affect how much will
  be supplied
• Prices of inputs used in the production of a
  good.
• Technology.
• Suppliers expectations.
• Taxes and subsidies.

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Price of Inputs

• When costs go up, profits go down, so that the
  incentive to supply also goes down.
• If costs go up substantially, the firm may even
  shut down.

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Technology

• Advances in technology reduce the number of
  inputs needed to produce a given supply of goods.
• Costs go down, profits go up, leading to
  increased supply.

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Expectations

• If suppliers expect prices to rise in the future,
  they may store today's supply to reap higher
  profits later.

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Taxes and Subsidies

• When taxes go up, costs go up, and profits go
  down, leading suppliers to reduce output.
• When government subsidies go up, costs go down,
  and profits go up, leading suppliers to increase
  output.

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The Supply Table

• Each supplier follows the law of supply.
• When price rises, each supplies more, or at least
  as much as each did at a lower price.

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From a Supply Table to a Supply Curve

• To derive a supply curve from a supply table, you
  plot each point in the supply table on a graph
  and connect the points.

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Individual and Market Supply Curves

• The market supply curve is derived by
  horizontally adding the individual supply curves
  of each supplier.

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From Individual Supplies to a Market Supply

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From Individual Supplies to a Market Supply
4.00
3.50
3.00
2.50
Price per DVD
2.00
1.50
1.00
0.50
0
1 2 3 4 5 6 7 8 9 10 11 12
13 14 15 16
Quantity of DVDs supplied (per week)
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Elasticity of Supply

• Elasticity of Supply
• To what extent supply changes as a result of
  change in price is called elasticity of supply.
• The economists presented the following concept of
  elasticity of supply.
• Elasticity Less than unity ( Es gt1)
• if change in supply is less than the change
  in price, is called less elastic situation. i.e.

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Qs
Price
3
100
3
4
110
Qs
100
110
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Elasticity of Supply (contd)

• Elasticity equal to unity (Es 1)
• if change in price is equal to change in
  supply, the elasticity of supply will be equal to
  one. i.e.

Price
S
3
Price Qs
2
100
2
3
150
100
150
Qs
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Elasticity of Supply (contd)

• Elasticity more than unity ( Es gt 1)
• if change in supply is greater than the
  change in price, the elasticity is called more
  elastic situation. i.e.

Price
S
Price Qs
2 3 100 200
3
2
100
Qs
200
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Measurement of supply elasticity.

• Like demand we can find elasticity of supply
  through the given formula, if the elasticity is
  found less than 1 the supply is said to be less
  elastic and when the elasticity becomes grater
  than 1, then the elasticity of supply is known as
  more or high elastic but when it is exactly equal
  to 1 it means that supply is unitary elastic
  which shows hundred percent change in quantity
  supplied to change in price.

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Mathematical explanation of Es

• The general formula for elasticity of Supply is
• Es change in quantity supplied / change in
  price
• Es ?Qs / ?P
• Es ?Qs ?P
• Q P
• Es ?Qs P
• Q ?P

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Supply Schedule
Points Price(Afs) Supply(Kg)
A 8.00 16
B 8.25 16.5
C 8.50 17
D 8.75 18
E 9.00 18
F 9.25 18.25
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Measurement Of Elasticity of Supply

• A to B
• C to D
• E to F
• Formula
• Es Change in Qs x price
• Change in price Quantity

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Cont.

• (1)A to B
• Es 16-16.5 x 8
• 8-8.25 16
• Es 0.5
• 0.5
• Es 01
• The elasticity of is equal to 1 which shows that
  elasticity of supply is unitary.

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Cont..

• (2)C to D
• Es 17-18 x 8.5
• 8.50-8.75 17
• Es 34
• 17
• Es O2
• Elasticity of supply is equal to 2 which shows
  that supply is more than unity

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Cont.

• (3)E to F
• Es 18.5-18.25 x 9
• 9-9.25 17
• Es 1
• 2
• Es 0.5
• Hence elasticity of supply is less than which
  shows that supply is than unitary

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Thank You !