Unit 2 Supply

8/9/2019 Unit 2 Supply

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Chapter 3

Supply


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Overview of Supply

Law of Supply

Supply Curve

Equilibrium Relationship between Demand and

Supply

Elasticity of Supply and its Types

Factors Influencing Supply



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The Law of Supply

The law of supply holds that other

things equal, as the price of a good

rises, its quantity supplied will rise,

and vice versa.

Why do producers produce more

output when prices rise?

They seek higher profits

They can cover higher marginalcosts of production


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Supply Curve

The supply curve has a positive slope, consistent with

the law of supply.


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Equilibrium

In economics, an equilibrium is a situation in

which:

there is no inherent tendency to change,

quantity demanded equals quantity supplied, and

the market just clears.


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Equilibrium

Equilibrium occurs at a price of $3 and a quantity of 30

units.


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Shortages and Surpluses

Ashortage occurs when quantity demanded

exceeds quantity supplied.

A shortage implies the market price is toolow.

Asurplus occurs when quantity supplied

exceeds quantity demanded.

A surplus implies the market price is toohigh.


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Shift in the Supply Curve

A change in any variable other than

price that influences quantity

supplied produces ashift in the

supply curve or a change in supply.

Factors that shift the supply curve

include:

Change in input costs

Increase in technology

Change in size of the industry


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Shift in the Supply Curve

For an given rental price, quantity supplied is now lower

than before.


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Elasticity of Supply

Elasticity of Supply is the degree of

responsiveness of change in supply to change

in price on the part of sellers.Proportionate Change in Qty Supplied

Elasticity of Supply = ------------------------------

Proportionate Change in Price



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Types ofElasticity of Supply

Types ofElasticity of

Supply

Numerical Value of

Coeff ofElasticity of

Supply

Verbal Description

1.Perfectly Elastic Supply Infinity Sellers are prepared to sell all they

can at the same price and none at alleven at a slightly lower price

2.Perfectly Inelastic Supply Zero Quantity supplied does not change

as a price change

3.Relatively Elastic Supply >1< infinity Quantity supplied changes by a large

percentage than price

4.Relatively Inelastic Supply Zero Quantity Supplied Changes by a

smaller percentage than price

5.Unitary Elastic Supply One Quantity Supplied Changes by

exactly the same percentage as price



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Factors Affecting Supply

1.Supply Depends on Price

2.Cost of production

3.Price of Other Products4.Change in Technology

5.Objective of the firm(eg Sales Maximisation

Rule)

6.Inflation

7.Imposition of Taxes by the Government8.Improvement in the means of Communication

9.Political Factors

10.Element of time and other factors/inputs.



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Thank You


Unit 2 Supply

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