Market SupplyMarket Supply

The Supply of a good or service is defined as :Quantities of a good or service that people are ready to sell at various prices within some given time period, other factors besides price held constant.

Supply is always referred to in relation to price and time. Supply is what a seller is able and willing to offer for sale.

Supply and StockSupply and Stock• Supply and stock are related but distinct terms:– Supply Comes Out of Stock: Supply is the amount of

stock offered for sale at a given price. Thus , stock is the basis of supply.

– Stock Determines the Potential Supply: Actual supply, is the stock or quantity really offered for sale by the seller at a particular price during a certain period.

– Stock is the outcome of Production: By increasing the production, the stock can be increased as well as the potential supply.

The Determinants of SupplyThe Determinants of Supply• Price• The cost Factors of Production• The State of Technology• Factors outside the Economic Sphere• Tax and Subsidy• Prices of other goods or services offered by the

seller• Future Expectations• Number of Sellers

Supply Function.• In Supply function, the determinants of supply can be

summarized as under:• Sx = f(Px, Pf, …………., Pz, O, T, t,s)• Where• Sx = the supply of commodity X• Px =The price of X• Pf = The set prices of the factor inputs employed for

producing X.• O = Factors outside the economic sphere• T= Technology used• t= tax• S=subsidy

Law of Supply• The law of supply suggests that the supply

varies directly with the changes in price. So, a larger amount is supplied at a higher price than at a lower price in the market.– A decrease in the price of a good, all other things

held constant, will cause a decrease in the quantity supplied of the good.

– An increase in the price of a good, all other things held constant, will cause an increase in the quantity supplied of the good.

Assumptions

• Cost of Production is Unchanged.• No change in Technique of Production• Fixed Scale of Production• Government Policies are Unchanged • No change in Transport Costs• No Speculation • The Prices of other Goods are help Constant.

Exceptions to the Law of Supply

• Generally the law of supply says that supply rises when price rises which is a universal phenomenon. But they are certain exceptions :

• i) PRESTIGE VALUE Goods ( or ) ANTIQUE Goods

They are certain goods which can’t be produced as they arehistorical goods. For this goods if prices rises the supply can’tincrease.

• ii) SUPPLY of LABOUR and SAVING It is observed that always if the wages of labour increase after certainextent, then the labour supply which is in terms of labour hour the workis willing to work only less hours.

Change in Quantity Supplied

Cause for Change in Supply

• Cost of Production• Supply also Depends on Natural Factors• Change in Technique of Production• Change in Input Prices• Change in the Number of Sellers• Policy of Govt also Influences Supply.• Development of Transport• Business combines

Change in Supply

Quantity

Price

P0

Q2Q

An increase in supply refers to a rightward shift in the market supply curve.

A decrease in supply refers to a leftward shift in the market supply curve.

Q1

DD2

D1

Market Equilibrium

• Equilibrium is a position of rest characterized by the absence of change.• Market equilibrium is determined at

the intersection of the market demand curve and the market supply curve.• The Equilibrium price causes quantity

demanded to be equal to quantity supplied.

Equilibrium When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.

As you can see on the chart, equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity. In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relation to fluctuations in demand and supply.

Disequilibrium occurs whenever the price or quantity is not equal to P* or Q*. 1. Excess Supply If the price is set too high, excess supply will be created within the economy and there will be allocative inefficiency. At price P1 the quantity of goods that the producers wish to supply is indicated by Q2. At P1, however, the quantity that the consumers want to consume is at Q1, a quantity much less than Q2. Because Q2 is greater than Q1, too much is being produced and too little is being consumed. The suppliers are trying to produce more goods, which they hope to sell to increase profits, but those consuming the goods will find the product less attractive and purchase less because the price is too high.

DISEQUILIBRIUM1. Excess Supply2. Excess Demand

Excess demand is created when price is set below the equilibrium price. Because the price is so low, too many consumers want the good while producers are not making enough of it. In this situation, at price P1, the quantity of goods demanded by consumers at this price is Q2. Conversely, the quantity of goods that producers are willing to produce at this price is Q1. Thus, there are too few goods being produced to satisfy the wants (demand) of the consumers. However, as consumers have to compete with one other to buy the good at this price, the demand will push the price up, making suppliers want to supply more and bringing the price closer to its equilibrium.

2. Excess Demand 

Changes in the Market Equilibrium - Relationship between Demand, Supply, Price and Quantity

Price in Rs Demand in Units Supply in Units State of

MarketPressure on

Price

30 5 25 D < S P

25 10 20 D < S P

20 15 15 D = S Neutral

10 20 10 S < D P

5 30 5 S < D P

Changes in the Market Equilibrium - Relationship between Demand, Supply, Price and Quantity

Quantity

Price

P0

Q0

D0 S0

Q1

P1

D1 An increase in demand will cause the market equilibrium price and quantity to increase.

Quantity

Price

P1

Q1

S0

Q0

P0

D0D1

A decrease in demand will cause the market equilibrium price and quantity to decrease.

Changes in the Market Equilibrium - Relationship between Demand, Supply, Price and Quantity

Quantity

Price

P0

Q0

D0 S0

Q1

P1

An increase in supply will cause the market equilibrium price to decrease and quantity to increase.

S1

Changes in the Market Equilibrium - Relationship between Demand, Supply, Price and Quantity

Quantity

Price

P1

Q1

D0

Q0

P0

A decrease in supply will cause the market equilibrium price to increase and quantity to decrease.

S1 S0

Changes in the Market Equilibrium - Relationship between Demand, Supply, Price and Quantity

ELASTICITY OF SUPPLY & ITS TYPES

Elasticity of supply shows the relationship between the change in the quantity supplied due to the changein the price.Five types:1. Perfectly Elastic Supply (ES = infinity) 2.Zero Elastic Supply (ES = 0)3.Unitary Elastic Supply (ES = 1) 4.Relatively Elastic Supply (ES > 1) 5.Relatively Inelastic supply (ES < 1)

Elasticity is calculated as follows:

• 1. Calculate the percentage change in Price– ((Initial Price – New Price) / Initial Price) * 100 = percentage (%)

change of price • 2. Calculate the percentage change in Quantity Supplied

– ((Initial Quantity – New Quantity) / Initial Quantity) * 100 = % change of supply

• 3. Calculate the Elasticity– % change of Quantity / % change of Price = Elasticity

Elastic Supply

• When Supply is Elastic, price has a large impact on the supply for a good.

• Elastic Supply often reflects a longer period of time as Supply is often difficult to change in the short term as many production factors must be considered.

• Put simply, if a Producer can collect a large price for an item, they will supply more of it – as soon as they can.

Inelastic Supply

• When Supply is Inelastic, price does not have a large impact on the supply for a good.

• Inelastic Supply generally reflects a short period of time as Supply is often difficult to change quickly as many production factors must be considered.

• Essentials, such as food, are generally Inelastic.

Unitary Elastic Supply

• When Supply is Unitary Elastic, price and quantity demanded move in lock step.

• This indicates that the percentage change in the price of the good will equal the percentage change in the demand for the good.

• This is a special case scenario.