Lecture1

1. THEORY OF SUPPLY Lecture-3 Prepared by Ahmed Ameen Mohamed

2. Chapter 3 - Theory of Supply • At the end of this chapter, student should be able to understand: • What supply is • Supply Schedule and Supply curve • The law of supply • Assumptions of the law • Individual and market supply • Determinants of supply • Change in quantity supplied vs change in supply • Theory of Equilibrium Prepared by Ahmed Ameen Mohamed

3. What is Supply “ The amounts of a product that producers are willing and able to make available for sale at each of a series of prices during a specific period” Prepared by Ahmed Ameen Mohamed

4. Supply Schedule and Supply curve • Supply Schedule: - A list showing the amount of a product that producers would produce and sell at a series of varying prices, during a certain time, with all the other factors held constant • Supply Curve • The graphical representation of the relation between the quantity supplied of a good that producers are willing and able to sell and the price of the good Prepared by Ahmed Ameen Mohamed

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6. LAW OF SUPPLY • “All else equal, as price rises, the quantity supplied rises, as price fall the quantity supplied falls” • Positive or direct relationship between the quantity supplied and the price Law of Supply Prepared by Ahmed Ameen Mohamed

7. Assumptions of Law • Constant cost of production • Constant price of capital goods • Constant technology Prepared by Ahmed Ameen Mohamed

8. THE REASON BEHIND THE LAW OF SUPPLY As more and more of a good is produced, beyond some production level, the costs of producing additional units begin to rise. In order for a firm to produce more of that good it has to charge (or be offered) higher prices.

9. Determinants of Supply • Price of the good • Resource Prices • Technology • Taxes and subsidies • Price of Other Goods • Expectations • Number of Sellers Prepared by Ahmed Ameen Mohamed

10. Change in Quantity Supplied vs. Change in Supply • Change in Quantity Supplied • Occurs due to change in the market price • Is represented by movement from one point to another on the same supply curve • Also called extension and contraction of supply • Change in Supply • Occurs due to change in determinants of supply other than price • Is represented by a shift in the supply curve either to the right or to the left • Also called rise and fall in supply Prepared by Ahmed Ameen Mohamed

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13. A CHANGE IN SUPPLY VERSUS A CHANGE IN QUANTITY SUPPLIED • A change in supply is not the same as a change in quantity supplied. • In this example, a higher price causes higher quantity supplied, and a move along the demand curve. • In this example, changes in determinants of supply, other than price, cause an increase in supply, or a shift of the entire supply curve, from SA to SB.

14. A CHANGE IN SUPPLY VERSUS A CHANGE IN QUANTITY SUPPLIED • When supply shifts to the right, supply increases. This causes quantity supplied to be greater than it was prior to the shift, for each and every price level.

15. FACTORS THAT SHIFT SUPPLY

16. INDIVIDUAL AND MARKET SUPPLY Prepared by Ahmed Ameen Mohamed

17. Individual and market supply curve Prepared by Ahmed Ameen Mohamed

18. Equilibrium • Consumers and producers react differently to price changes. • Higher prices tend to reduce demand while encouraging supply • lower prices increase demand while discouraging supply. “equilibrium exists when the price for a product reaches a point at which the demand for the product at that price equals the level of production or the associated current supply” Prepared by Ahmed Ameen Mohamed

19. EQUILIBRIUM Prepared by Ahmed Ameen Mohamed

20. EXCESS SUPPLY OR SURPLUS • Excess Supply At a given price, the excess of quantity supplied over quantity demanded • Price of the good will fall as sellers compete with each other to sell more of the good than buyers want Prepared by Ahmed Ameen Mohamed

21. EXCESS DEMAND OR SHORTAGE • Excess demand At a given price, the excess of quantity demanded over quantity supplied • Price of the good will rise as buyers compete with each other to get more of the good than is available Prepared by Ahmed Ameen Mohamed

22. CHANGES IN EQUILIBRIUM Prepared by Ahmed Ameen Mohamed

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24. 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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