Supply Analysis

Supply refers to the quantities of a product that

producers are willing and able to offer at a given price
during some period of time.
Sellers intend to make a profit from their sales.
Economists assume that sellers want their profits to be
maximized.
Sellers supply higher level of quantity when the price
is higher.
Production costs are determined not only by the prices
of inputs, but also by technology.

Law of Supply
The law of supply states that sellers will offer more of
a good at a higher price and less at a lower price.
The relationship between the quantity sellers want to
sell during some time period (quantity supplied) and
price is what economists call the supply curve.
The supply curve can be expressed mathematically in
functional form as:
Qs = f(price, other factors held constant).

Supply Schedule
Table: Supply Schedule
Price of Pens
(Rs.)

Number of
pens seller
wants to sell

10

20

20

40

50

70

80

100

Supply Curve
Supply Curve

Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.

Shift in Supply Curve

Shift in the supply curve is also sometimes referred as a
change in supply.
It happens due to changes in factors of supply other than that
of price of the good.
For example, if the price of a factor of a related good increases
the supply curve shifts.
Similarly changes in technology and government tools like tax
and subsidy tends to shift the supply curve.
A shift towards the right in the curve denotes an increase in
supply of the good at all levels of prices.
Similarly a shift in the supply curve towards the left denotes a
decrease in supply of the good at all levels of prices.

Shifts in Supply Curve

Shifts in Supply Curve

A shift in supply will occur if either of the following changes:

The (opportunity) cost of resources needed to produce the good
The technology available to produce the good.

Either factor could cause the supply curve to shift to the left
(a decrease in supply) or to the right (an increase in supply).

Factors Affecting Supply

Price of the product: A producer always aims to maximize his/her returns/profit. Hence, the quantity supplied
changes with increase or decrease in the price of the good.
Technological changes: Advanced technology results in more quantity being produced at lesser costs. Then
the producer would supply more quantity of the goods
Resource supplies and production costs: Changes in production costs like wage costs, raw material cost and
energy costs might impact the producers production and eventually the supply. An increase in such cost might
result in lesser quantities produced and thus lesser quantities supplied and vice versa
Tax or subsidy: An increase in tax will increase the total cost, thereby decreasing the supply. Similarly a
subsidy will decrease the total cost thereby increasing the supply so as to maximise the profits.
For example an increase in tax can be used to reduce the supply of cigarettes, while increase in subsidy can
be used to increase the supply of fertilizers
Expectations of prices in future: An expectation that the prices of goods will fall in future might lessen the
production by the producer and thereby decrease the supply and vice-versa.
Price of other goods: A producer might have several options to produce. Since the money to invest is limited
with the producer he would decide to produce the good which offers him the maximum profit. Thus if the
producer is currently producing good A and the price of good B increases than he might switch to producing
good B as this would result in better returns for him.
Number of producers in the market: If there are large number of producers or sellers in the market willing to
sell goods than the supply of good will increase and vice versa.

Supply Elasticity
Elasticity of supply of a good is defined as the percentage
change in quantity supplied to percentage change in the price
of that good.
It expressed as:
Q s
Es

Q
Ps
P

Where, Qs is the change in the quantity supplied,

Q is the original quantity supplied
P
is the change in price
P is the original price
s

Kinds Of Supply
Elasticity
Price elasticity of supply: Price elasticity of supply measures the
responsiveness of changes in quantity supplied to a change in price.
Perfectly inelastic: If there is no response in supply to a change in
price.
(Es = 0)
Inelastic supply: The proportionate change in supply is less than
the change in price (Es = 0-1)
Unitary elastic: The percentage change in quantity supplied equals
the change in price (Es=1)
Elastic: The change in quantity supplied is more than the change in
price
(Ex= 1- )
Perfectly elastic: Suppliers are willing to supply any amount at a
given
price (Es=)

Supply Problem
Consider a producer who is willing to
supply 100 quintals of wheat at the
price of Rs. 110 per quintal. If the
price increases to Rs. 120 per
quintal, he is willing to supply 125
quintals of wheat. Compute the
elasticity of supply of wheat.

Supply Problem
Solution: Elasticity of supply of
wheat will be computed as: Es=
(q/p) x (p/q) = (25/10) x
(110/100 ) = 2.75.
It means that that if the price of
wheat goes up by 1%, the supply of
wheat will increase by 2.75%.

Demand and Supply Curves

Quantit
y
Deman
ded

Price

Quantit
y
Supplie
d

18

15

12

17