CHAPTER THREE
SUPPLY ANALYSIS
Supply:
The quantity of a good or service offered for sale in a market depends on a large number of factors (variables).
Certainly, the most important determinant of the quantity offered for sale is the price of the product under
.consideration. The higher the price of the product, the more of it would be offered for sale.
Supply is a list of prices and the corresponding quantities that a group of suppliers (firms) would be willing and able
to offer for sale at each price at a particular point of time.
Market Supply:
At any fixed point of time, there is also a definite relationship between the prices of a good or service, and the
quantity of it supplied. The supply relationship is ordinarily direct, which means that we expect quantity supplied to
be greater at a higher price than at a lower price.
A schedule that gives the quantities of a good or service supplied by all sellers at various prices is called a market
supply schedule. Basically, a business firm is a producing unit that uses the services of labour, capital and natural
resources to produce a saleable product.
For example, an agricultural commodity such as wheat is produced by thousands of farmers in India. Whatever may
be the state of technology (the amount of production), nature of the production process, quality of inputs (including
fertility of the soil) we expect the quantity of wheat supplied to rise when the price of wheat rises.
Given the costs of production and prices of other grains, we would expect more acres to be devoted to wheat when
the price of wheat rises.
The market supply of wheat is, therefore, a schedule, that gives the quintals of wheat that all producers would be
willing to sell at various prices. The schedule may be expressed in the tabular form, or it may be graphed. When a
supply schedule is graphed, it is often called a supply curve. Even when a supply schedule is linear when graphed,
we still call it a supply curve.
The Empirical Law of Supply:
The direct relationship between the price of a commodity and the quantity supplied of the same is observed with
such regularity that it is known as the law of supply, “all factors held constant the supply of a commodity to a
market increases with price increase”.
An algebraic expression of the relationship between price and quantity supplied of a commodity is known as a
supply function; Qx= g(Px)
The law of supply holds for two reasons:
A higher price would lead to greater profits for firms already producing and selling the good or service and thus
they would be induced to produce and sell more.
The higher price and consequent higher profits would tend to lure new firms into the market and therefore cause
more goods to be supplied.
While the price of the good itself is the most important variable affecting the quantity of the good offered for sale,
there are other variable as well. The first of these is the level of available technology. An improvement in the state of
technology would lower the costs of producing the good and, therefore, would, other things remaining the same
increase the quantity of output supplied. The other variables are in the expression;
Qx,t= g(Px,t, Tt, PF,t Pr,t Pex,t+i)
That is the quantity supplied of a particular commodity in period is determined not only by the price of that
commodity (Px t) but also by the level of available technology (T t), the price of the factors of production used (PF,t)
the prices of any commodities related in production (P r,t), and the expectations of the producers regarding the future
price of the commodity (PeX,t+i).
The relations between the quantity offered for sale and the various variables may be summarized as follows.
Holding other things constant, we get,
ECONOMICS COURSE NOTES: CHAPTER 3 – SUPPLY ANALYSIS PREPARED BY MR. ANTONY AMBIA Page 1
,The Supply Function:
While analyzing the relation between the quantities offered for sale and any of the determinants, economists usually
focus upon the relation between quantity supplied and the product price. As the price of a product increases, more is
supplied by sellers, holding all variable constant. Also as the price of a product decreases, less is supplied by sellers,
holding all variable constant.
The supply functions may be expressed as:
Qx= g(Px)
Or supply can be specified by a schedule or a graph. Let us consider the market supply schedule for a good shown in
Table 6.3. This table shows the minimum price necessary to induce firms to supply, per unit of time, for each of the
six quantities listed.
In order to induce the firms to supply larger quantities, price has to rise. For example, if price increases from Rs. 4 to
Rs. 5, firms will increase quantity supplied from 6,000 units to 6,500 units.
This schedule shows the minimum price acceptable to firms to supply each quantity shown in the list. Here price and
quantity supplied are directly related; as price fall firms supply less. The supply schedule shows the minimum price
necessary to induce producers voluntarily to offer each possible quantity for sale and that an increase in price is
required to induce an increase in quantity supplied, other things remaining the same.
Supply curve graph
When plotting all price-quantity combinations and join these points by a line we get a curve, the supply curve. Thus
the supply curve is a graphical representation of the supply schedule — a locus of points showing alternative price-
quantity combinations. Since quantity supplied and price vary directly, the resulting supply curve slopes upwards
from left to right.
ECONOMICS COURSE NOTES: CHAPTER 3 – SUPPLY ANALYSIS PREPARED BY MR. ANTONY AMBIA Page 2
, Supply: Nature and Determinants of Supply
Suppliers:
In general, we use the term ‘suppliers’ to refer to organizations that make decisions about how many goods to
supply at various prices and in different market situations. We use various other terms to refer to suppliers such as
sellers, producers, businesses and enterprises. In short, the organizations responsible for supply of goods are called
suppliers.
Sellers’ Objectives:
We initially assume that the objective or goal of a supplier is to make as much profit as possible. When a supplier
succeeds in achieving this goal, he is said to have reached the optimal point. We do find similarity between the
consumer’s goal of utility maximisation and the supplier’s goal of profit maximization. In this context, it is
interesting to note that profits can be measured in terms of money, but utility (or consumer satisfaction) cannot be
directly observed or measured.
Time:
The theory of supply, the focus is on the quantity of a commodity offered for sale per period of time. Thus, in all
diagrams, we measure quantity per period of time (on the horizontal axis).
Determinants of the Quantity Supplied of a Commodity the Supply Function:
a. The price of the commodity
b. The prices of other commodities
c. The prices of factors of production
d. The objectives of producers, and
e. The state of technology (or the art of production).
Thus the quantity supplied of a commodity depends on a number of factors. The following factors bear relevance in
this context.
Price of the Commodity:
The most important factor influencing the quantity supplied of a commodity is the price of the commodity under
consideration.
The higher the price of a good the greater is the chance of making profit. Thus, the greater is the incentive to
produce more and offer it for sale in the market. However, there are certain important exceptions to this type of
producer behaviour.
The supply curve is upward sloping, because the sellers normally feel that the higher the price of a commodity the
larger the quantity that can profitably be offered for sale in the market place.
Other Determinants of Supply:
ECONOMICS COURSE NOTES: CHAPTER 3 – SUPPLY ANALYSIS PREPARED BY MR. ANTONY AMBIA Page 3
SUPPLY ANALYSIS
Supply:
The quantity of a good or service offered for sale in a market depends on a large number of factors (variables).
Certainly, the most important determinant of the quantity offered for sale is the price of the product under
.consideration. The higher the price of the product, the more of it would be offered for sale.
Supply is a list of prices and the corresponding quantities that a group of suppliers (firms) would be willing and able
to offer for sale at each price at a particular point of time.
Market Supply:
At any fixed point of time, there is also a definite relationship between the prices of a good or service, and the
quantity of it supplied. The supply relationship is ordinarily direct, which means that we expect quantity supplied to
be greater at a higher price than at a lower price.
A schedule that gives the quantities of a good or service supplied by all sellers at various prices is called a market
supply schedule. Basically, a business firm is a producing unit that uses the services of labour, capital and natural
resources to produce a saleable product.
For example, an agricultural commodity such as wheat is produced by thousands of farmers in India. Whatever may
be the state of technology (the amount of production), nature of the production process, quality of inputs (including
fertility of the soil) we expect the quantity of wheat supplied to rise when the price of wheat rises.
Given the costs of production and prices of other grains, we would expect more acres to be devoted to wheat when
the price of wheat rises.
The market supply of wheat is, therefore, a schedule, that gives the quintals of wheat that all producers would be
willing to sell at various prices. The schedule may be expressed in the tabular form, or it may be graphed. When a
supply schedule is graphed, it is often called a supply curve. Even when a supply schedule is linear when graphed,
we still call it a supply curve.
The Empirical Law of Supply:
The direct relationship between the price of a commodity and the quantity supplied of the same is observed with
such regularity that it is known as the law of supply, “all factors held constant the supply of a commodity to a
market increases with price increase”.
An algebraic expression of the relationship between price and quantity supplied of a commodity is known as a
supply function; Qx= g(Px)
The law of supply holds for two reasons:
A higher price would lead to greater profits for firms already producing and selling the good or service and thus
they would be induced to produce and sell more.
The higher price and consequent higher profits would tend to lure new firms into the market and therefore cause
more goods to be supplied.
While the price of the good itself is the most important variable affecting the quantity of the good offered for sale,
there are other variable as well. The first of these is the level of available technology. An improvement in the state of
technology would lower the costs of producing the good and, therefore, would, other things remaining the same
increase the quantity of output supplied. The other variables are in the expression;
Qx,t= g(Px,t, Tt, PF,t Pr,t Pex,t+i)
That is the quantity supplied of a particular commodity in period is determined not only by the price of that
commodity (Px t) but also by the level of available technology (T t), the price of the factors of production used (PF,t)
the prices of any commodities related in production (P r,t), and the expectations of the producers regarding the future
price of the commodity (PeX,t+i).
The relations between the quantity offered for sale and the various variables may be summarized as follows.
Holding other things constant, we get,
ECONOMICS COURSE NOTES: CHAPTER 3 – SUPPLY ANALYSIS PREPARED BY MR. ANTONY AMBIA Page 1
,The Supply Function:
While analyzing the relation between the quantities offered for sale and any of the determinants, economists usually
focus upon the relation between quantity supplied and the product price. As the price of a product increases, more is
supplied by sellers, holding all variable constant. Also as the price of a product decreases, less is supplied by sellers,
holding all variable constant.
The supply functions may be expressed as:
Qx= g(Px)
Or supply can be specified by a schedule or a graph. Let us consider the market supply schedule for a good shown in
Table 6.3. This table shows the minimum price necessary to induce firms to supply, per unit of time, for each of the
six quantities listed.
In order to induce the firms to supply larger quantities, price has to rise. For example, if price increases from Rs. 4 to
Rs. 5, firms will increase quantity supplied from 6,000 units to 6,500 units.
This schedule shows the minimum price acceptable to firms to supply each quantity shown in the list. Here price and
quantity supplied are directly related; as price fall firms supply less. The supply schedule shows the minimum price
necessary to induce producers voluntarily to offer each possible quantity for sale and that an increase in price is
required to induce an increase in quantity supplied, other things remaining the same.
Supply curve graph
When plotting all price-quantity combinations and join these points by a line we get a curve, the supply curve. Thus
the supply curve is a graphical representation of the supply schedule — a locus of points showing alternative price-
quantity combinations. Since quantity supplied and price vary directly, the resulting supply curve slopes upwards
from left to right.
ECONOMICS COURSE NOTES: CHAPTER 3 – SUPPLY ANALYSIS PREPARED BY MR. ANTONY AMBIA Page 2
, Supply: Nature and Determinants of Supply
Suppliers:
In general, we use the term ‘suppliers’ to refer to organizations that make decisions about how many goods to
supply at various prices and in different market situations. We use various other terms to refer to suppliers such as
sellers, producers, businesses and enterprises. In short, the organizations responsible for supply of goods are called
suppliers.
Sellers’ Objectives:
We initially assume that the objective or goal of a supplier is to make as much profit as possible. When a supplier
succeeds in achieving this goal, he is said to have reached the optimal point. We do find similarity between the
consumer’s goal of utility maximisation and the supplier’s goal of profit maximization. In this context, it is
interesting to note that profits can be measured in terms of money, but utility (or consumer satisfaction) cannot be
directly observed or measured.
Time:
The theory of supply, the focus is on the quantity of a commodity offered for sale per period of time. Thus, in all
diagrams, we measure quantity per period of time (on the horizontal axis).
Determinants of the Quantity Supplied of a Commodity the Supply Function:
a. The price of the commodity
b. The prices of other commodities
c. The prices of factors of production
d. The objectives of producers, and
e. The state of technology (or the art of production).
Thus the quantity supplied of a commodity depends on a number of factors. The following factors bear relevance in
this context.
Price of the Commodity:
The most important factor influencing the quantity supplied of a commodity is the price of the commodity under
consideration.
The higher the price of a good the greater is the chance of making profit. Thus, the greater is the incentive to
produce more and offer it for sale in the market. However, there are certain important exceptions to this type of
producer behaviour.
The supply curve is upward sloping, because the sellers normally feel that the higher the price of a commodity the
larger the quantity that can profitably be offered for sale in the market place.
Other Determinants of Supply:
ECONOMICS COURSE NOTES: CHAPTER 3 – SUPPLY ANALYSIS PREPARED BY MR. ANTONY AMBIA Page 3
