2. LAW OF SUPPLY - P.Bharathi

3. 2 SUPPLY DEFINED Rs1 2 3 4 5 PQSQS Good A 5 20 35 50 60 Supply schedule is a table that shows the amount of goods the producers are willing to supply a different price levels

4. 3 LAW OF SUPPLY  As Price Rises… …Quantity Supplied Rises  As Price Falls… …Quantity Supplied Falls A direct relationship exists between price and quantity supplied

5. 4 5 P Q o Rs.5 4 3 2 1 10 20 30 40 50 60 70 80 Rs.5 4 3 2 1 60 50 35 20 5 PQSQSPrice Quantity SupplySchedule SUPPLY CURVE

6. 5 P Q o Rs5 4 3 2 1 10 20 30 40 50 60 70 80 Rs.5 4 3 2 1 60 50 35 20 5 PQSQSPrice Quantity SUPPLY CURVE SupplySchedule

7. 6 35 P Q o Rs.5 4 3 2 1 10 20 30 40 50 60 70 80 Rs.5 4 3 2 1 60 50 35 20 5 PQSQSPrice Quantity SUPPLY CURVE SupplySchedule

8. 7 P Q o Rs.5 4 3 2 1 10 20 30 40 50 60 70 80 Rs.5 4 3 2 1 60 50 35 20 5 PQSQSPrice Quantity SUPPLY CURVE SupplySchedule

9. 8 P Q o Rs.5 4 3 2 1 10 20 30 40 50 60 70 80 Rs.5 4 3 2 1 60 50 35 20 5 PQSQSPrice Quantity SUPPLY CURVE SupplySchedule

10. 9 S P Q o Rs.5 4 3 2 1 10 20 30 40 50 60 70 80 Rs.5 4 3 2 1 60 50 35 20 5 PQSQSPrice Quantity SUPPLY CURVE SupplySchedule

11. 10 S P Q o Rs.5 4 3 2 1 10 20 30 40 50 60 70 80 Rs.5 4 3 2 1 60 50 35 20 5 PQSQSPrice Quantity SUPPLY CURVE SupplySchedule

12. 11. QS 2 Direct Reasons for direct relationship 1. There is increasing opportunity cost if you don’t produce. 2. Current producers produce more 3. New producers are attracted to the market. “S” refers to the “whole supply curve” and refers to what producers will supply at “different prices” producers will supply at “different prices” “QS” refers to a “point on the curve” and refers to what producers will supply at a “particular price” producers will supply at a “particular price” S QS 1 QS 1 P2P2P2P2 P1P1P1P1 increasesincreases Price increases; QS increases decreasesdecreases Price decreases; QS decreases

13. 12 S P Q o Rs.5 4 3 2 1 10 20 30 40 50 60 70 80 Rs.5 4 3 2 1 60 50 35 20 5 PQSQSPrice Quantity SUPPLY CURVE SupplySchedule

14. 13 S P Q o Rs.5 4 3 2 1 10 20 30 40 50 60 70 80 Price Quantity Rs.5 4 3 2 1 60 50 35 20 5 PQSQS 80 70 60 45 30 S’ Increase in Supply Increase in Quantity Supplied SUPPLY CURVE SupplySchedule

15. 14 Changes in Supply and in Quantity Supplied QuantityPrice S2S2S2S2 S1S1S1S1 Entire supply curve shifts rightward when: price of input ↓ price of input ↓ price of alternate good ↓ price of alternate good ↓ number of firms ↑ number of firms ↑ expected price ↑ expected price ↑ technology advances technology advances favorable weather favorable weather

16. 15 S P Q o Rs.54321 10 20 30 40 50 60 70 80 Rs.54321 60503520 5P QSQSQSQSPrice Quantity S’ 453020 0 -- -- DecreaseinSupply Decrease in Quantity Supplied SUPPLY CURVE SupplySchedule

17. 16 Changes in Supply and in Quantity Supplied QuantityPrice S1S1S1S1 S2S2S2S2 Entire supply curve shifts leftward when: price of input ↑ price of input ↑ price of alternate good ↑ price of alternate good ↑ number of firms ↓ number of firms ↓ expected price ↓ expected price ↓ unfavorable weather unfavorable weather

18. 17 Factors that Shift the Supply Curve  Input prices A fall (rise) in the price of an input causes an increase (decrease) in supply, shifting the supply curve to the right (left) A fall (rise) in the price of an input causes an increase (decrease) in supply, shifting the supply curve to the right (left)  Price of Related Goods When the price of an alternate good rises (falls), the supply curve for the good in question shifts leftward (rightward) When the price of an alternate good rises (falls), the supply curve for the good in question shifts leftward (rightward)  Technology Cost-saving technological advances increase the supply of a good, shifting the supply curve to the right Cost-saving technological advances increase the supply of a good, shifting the supply curve to the right

19. 18 Factors that Shift the Supply Curve  Number of Firms An increase (decrease) in the number of sellers—with no other changes—shifts the supply curve to the right (left) An increase (decrease) in the number of sellers—with no other changes—shifts the supply curve to the right (left)  Expected Price An expectation of a future price increase (decrease) shifts the current supply curve to the left (right) An expectation of a future price increase (decrease) shifts the current supply curve to the left (right)

20. 19 Factors that Shift the Supply Curve  Changes in weather Favorable weather Favorable weather Increases crop yieldsIncreases crop yields Causes a rightward shift of the supply curve for that cropCauses a rightward shift of the supply curve for that crop Unfavorable weather Unfavorable weather Destroys cropsDestroys crops Shrinks yieldsShrinks yields Shifts the supply curve leftwardShifts the supply curve leftward  Other unfavorable natural events may effect all firms in an area Causing a leftward shift in the supply curve Causing a leftward shift in the supply curve

21. 20 Shift in the Supply Curve  A change in any variable other than price that influences quantity supplied produces a shift in the supply curve or a change in supply.  Factors that shift the supply curve include: Change in input costs Change in input costs Increase in technology Increase in technology Change in size of the industry Change in size of the industry

22. 21 DETERMINANTS OF SUPPLY  Resource Prices  Technology  Taxes & Subsidies  Prices of Other Goods  Price Expectations  Number of Sellers

23. 22 ELASTICITY OF SUPPLY  Elasticity of supply measures the relationship between change in quantity supplied and a change in price.  Formula:

24. 23 ELASTICITY OF SUPPLY (1) When supply is elastic, producers can increase production without a rise in cost or a time delay (2) When supply is inelastic, firms find it hard to change their production levels in a given time period.

25. 24 Determinants of Supply Elasticity  Factor substitution possibilities Factor substitutability with a change in demand Factor substitutability with a change in demand Factor substitution at low cost Factor substitution at low cost When factors are highly specialized, substitution may be harder and thus supply will be inelastic When factors are highly specialized, substitution may be harder and thus supply will be inelastic  Availability of excess production capacity When there is spare capacity, businesses can expand output easily to meet rising demand without upward pressure on costs When there is spare capacity, businesses can expand output easily to meet rising demand without upward pressure on costs

26. 25  Stocks (inventories) available to meet demand A low level of stocks makes supply inelastic in the short term A low level of stocks makes supply inelastic in the short term When stocks can be released onto the market, supply is elastic When stocks can be released onto the market, supply is elastic  The time frame allowed Momentary period (fixed supply) Momentary period (fixed supply) Short run (inelastic supply) Short run (inelastic supply) Long run (elastic supply) Long run (elastic supply)  Artificial limits on supply E.g. the impact of patents that limit which firms can supply a product E.g. the impact of patents that limit which firms can supply a product Determinants of Supply Elasticity

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