Things to Know

What is Supply?

Supply refers to the amount of goods or services a person is willing and able to offer for sale at a particular price, at a particular point in time.

Laws of Supply

There are 2 Laws of Supply:

(1) More will be supplied at a higher price than at a lower price, assuming ceteris paribus.
(2) Less will be supplied at a lower price than at a higher price, assuming ceteris paribus.

The Supply Schedule

This is a tabular representaion displaying the relationship between price and quantity supplied.

This is an example of a Supply Schedule

$$ Price \uparrow, \space Q_s \uparrow $$ $$ Price \downarrow, \space Q_s \downarrow $$

The Supply Curve

The supply curve is a graphical representation of the relationship between Price and Quantity Supplied.

(i) Individual Supply Curve

The supply curve slopes upwards from left to right.

The supply curve is positively sloped.

i.e.

$ P \uparrow, \space Q_s \uparrow$
$ P \downarrow, \space Q_s \downarrow$

(ii) Market Supply Curve

The Market Supply Curve is the horizontal summation of each individual supplier's output at each price level.

Determinants of Supply

Price Determinants

Increase in Price

As the price of the commodity increases, from $10 to $20, quantity supplied increases from 30 units to 60 units. There is an upward movement along the supply curve from point A to point B known as an extension in supply, assuming ceteris paribus.

Decrease in Price

As the price of a commodity decreases from $20 to $10, quantity supplied decreases from 60 units to 30 units. There is a downward movement along the supply curve from point C to point D known as a contraction in supply, assuming ceteris paribus.

Non-price Determinants

Rightward Shift / Increase in Supply

(a) An Decrease in Price of Factors of Production As the price of factor inputs decrease, this leads to a decrease in the cost of production for the firm. As a result, it is now cheaper to produce the good and supply increases as shown by a rightward shift of the supply curve, assuming ceteris paribus.

(b) Technological Advancements If the firm employs new forms of technology, the supply is likely to increase and result in a rightward shift in the supply curve, assuming ceteris paribus.

(c) Favourable Weather Conditions favourable weather conditions is likely to cause supply to increase and result in a rightward shift in the supply curve, assuming ceteris paribus.

(d) Governments Policy (i) Provision of Subsides - This is a grant given to the producer by the government to lower the cost of production. Therefore this is likely to lead to an increase in the supply and consequently a rightward shift of the supply curve, assuming ceteris paribus.

(ii) Decrease Indirect Taxes - Indirect taxes affect the firm's cost of production. If the government decreases indirect taxes, then the producer's cost of production is likely to decrease and result in an increase in supply. This is shown by a rightward shift in the supply curve, assuming ceteris paribus.

Leftward Shift / Decrease in Supply

(a) An Increase in Price of Factors of Production As the price of factor inputs increase, this leads to a increase in the cost of production for the firm. As a result, it is now more expensive to produce the good and supply decreases as shown by a leftward shift of the supply curve, assuming ceteris paribus.

(b) Technological Advancements If the firm employs obsolete technology, the supply is likely to decrease and result in a leftward shift in the supply curve, assuming ceteris paribus.

(c) Not Favourable Weather Conditions Not favourable weather conditions is likely to cause supply to decrease and result in a leftward shift in the supply curve, assuming ceteris paribus.

(d) Governments Policy (i) Reduction in the provision of subsides - This is likely to lead to an decrease in the supply since the cost of production is no longer reduced, hence, a leftward shift of the supply curve, assuming ceteris paribus.

(ii) Increase Indirect Taxes - Indirect taxes affect the firm's cost of production. If the government increases indirect taxes, then the producer's cost of production is likely to increase and result in an decrease in supply. This is shown by a leftward shift in the supply curve, assuming ceteris paribus.