Supply

 Indicates the quantities of a good or service that the

seller is willing and able to provide at a price, at a given
point of time, other things remaining the same.
 Supply of a product X (Sx) depends upon:
 Price of the product (Px)
 Cost of production (C)
 State of technology (T)
 Government policy regarding taxes and subsidies (G)
 Other factors like number of firms (N)
 Hence the supply function is given as:
Sx = (Px, C, T, G, N)
 Law of Supply
 Law of Supply states that other things remaining the same, the
higher the price of a commodity the greater is the quantity supplied.
 Price of the product is revenue to the supplier; therefore higher price
means greater revenue to the supplier and hence greater is the
incentive to supply.
 Supply bears a positive relation to the price of the commodity.

Supply Schedule Supply Curve

Point on Price Supply (‘000 35 e
Supply (Rs. Per cups per 30
Curve cup) month) d
25
a 15 10 c
20
b 20 20 b
15
c 25 30 a

d 30 45
10 20 30 40 50 60
e 35 60
Quantity of Coffee
Change in Quantity Supplied
Price
Supply
curve, S1

2 As price changes,
quantity supplied
changes
1.50

0 2 3 Quantity
 Change in Supply

 Shift in the supply curve from

S0 to S1
S2  More is supplied at each
Price S0 price.
 Increase in supply caused by:
S1
 Improvements in the
technology
 Fall in the price of inputs
 Shift in the supply curve from
S0 to S2
 Less is supplied at each
price.
 Decrease in supply caused by:
O  A rise in the price of inputs
Quantity  Change in government
policy (Tax)
 Market Equilibrium
 Equilibrium occurs at the price where the quantity demanded
and the quantity supplied are equal to each other.
 For prices below the equilibrium, quantity demanded
exceeds quantity supplied (D>S). Pulling price upward.
 For prices above the equilibrium, quantity demanded is less
than quantity supplied (D<S). Pushing price downward.

Supply Demand(‘0
Price S Price (‘000 cups / 00 cups /
(Rs) month) month)
E 15 10 50
25
20 15 40
25 30 30
D 30 45 15
O 35 70 10
30 Quantity
 Changes in Market Equilibrium
(Shifts in Supply Curve)

 The original point of equilibrium is

at E curves D1 and S1, at price P and
quantity Q
S0

Price
 An increase in supply shifts the
supply curve to S2. D1 S1
Price falls to P2 and quantity rises S2
to Q2, taking the new equilibrium to E0
P0
E2 . E
P E2
 A decrease in supply shifts the P2 0
S
supply curve to S0. Price rises to P0 S1
and quantity falls to Q0 taking the S2
new equilibrium to E0 D1
Thus an increase in supply raises O
Q0 Q Q2 Quantity
quantity but lowers prices while a
decrease in supply lowers quantity
but raises price; demand being
unchanged.
 Changes in Market Equilibrium
(Shifts in Demand Curve)

 The original point of equilibrium is

at E curves D1 and S1, at price P and
quantity Q
Price

 An increase in demand shifts the

D2 demand curve to D2 .
S1  Price rises to P1 and quantity
D1
rises to Q1 taking the new
D0 equilibrium to E1
E1
P1  A decrease in demand shifts the
E demand curve to D0.
P E2
P*  Price falls to P* and quantity falls
D2 to Q* taking the new equilibrium
to E2.
S1 D0 D1
 Thus, an increase in demand
O raises both price and quantity while a
Q* Q1
Quantity decrease in demand lowers both
price and quantity; when supply
remains same.
 Change in Both Demand and Supply
Overall effect depends on supply response. Whether price will
rise, or remain at the same level, or will fall, will depend on the
magnitude of shift and also on the shapes of the demand and
Price supply curves.

Supply

Rs 2.50 New equilibrium

Further
2.00
resulting supply
in a higher Initial
price... equilibrium
D2

D1

0 7 10 13 Quantity
Change in Both Demand and Supply
 Therefore, an increase in both
supply and demand will cause
the sales to rise, but the effect
on price can be
 positive, D increases
more than S
 negative S increases
more than D
 No change increase in
D=S