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Definition

  • Supply is the Willingness and Ability for a producer to produce and sell a good at a specific Price, Quantity and Time.

The law of supply

  • Whenever there is an increase in price of a good, the supply for that good will increase, or if there is a decrease in price of a good, the supply of a good will decrease. Ceteris Paribus.

The supply curve

  • There are 2 types of movements along the curve, extension and contraction just like demand, these only occur when price changes are the cause of the supply change.

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  • Extension: Supply increases due to increase in price.(QS1 TO QS3)

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  • Contraction: Supply decreases due to decrease in price(QS1 TO QS2)

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  • Same principles as for demand

Screenshot 2024-10-08 at 10.55.01 PM.png

Movements along the supply curve

  • There are 2 types of movements along the curve, extension and contraction just like demand, these only occur when price changes are the cause of the supply change.

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  • Extension: Supply increases due to increase in price.(QS1 TO QS3)

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  • Contraction: Supply decreases due to decrease in price(QS1 TO QS2)

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  • Same principles as for demand

Screenshot 2024-10-08 at 11.01.59 PM.png

Individual and market supply

  • Same as for demand, individual supply is the supply by a individual firm at a given price.

  • Market supply is the total of all individual supplies in the market.

  • Individual supplies(10,3,7 at price $10)

  • So market supply at price $10 is 20( 10+3+7 )

Assumptions

The law of diminishing marginal returns

  • This states that if there is a increasing variable input ( say labour ) to fixed factors ( say land ) there will be initially a increase in productivity, but after a point the  benefits of hiring more of the variable input will reduce, or the marginal return from the input reduces.

  • Hence productivity reduces, this is often due to overcrowding. Too many workers to produce efficiently. Example

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    No. of workers.    Total output.      Marginal return 

  •      One                             10                        10   

 

  •      Two                              23.                        13  

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  •      Three                            37                         14

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  •      Four                             45                          8

 

  • At four workers we can see overcrowding has occurred as marginal returns have started to decrease.

  • With this you can also understand what marginal returns are; benefits that a single unit of labour in this case brings to a firm

The law of increasing marginal costs

  • This states that if the producer wants to increase quantity supplied of their good, the additional cost of producing each good will also increase.

  • Hence we see in supply curves that supply only extends when the prices increase as the higher prices are needed to cover up the firms extra costs. Only then will they supply more of the good.

Non price determinants of supply

  • Costs of production: This refers to the cost of resources, if COP increases the profit margins for the current supply curve would reduce hence the firm would reduce supply at current price. Shift to left. If costs reduce there will be a shift to the right.

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  • Indirect taxes: indirect taxes affect cost of production, if taxes increase, costs increase; shift to left, if taxes decrease, cost decrease; shift to the right.

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  • Subsidies: Subsidies are grants given by the government to the firms to reduce their cost of production. If subsidies reduce the costs increase, shift to the left. If subsidies increase, costs reduce, shift to the right.

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  • New technology: New technologies increase productivity and lower cost of production, hence shift to the right. If firms are using ageing technology the productivity reduces and costs increase. Shift to the right.

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  • Number of suppliers: If there are more suppliers entering the market, the supply will increase, there will be a shift to the right. If there are suppliers exiting the market, the supply will decrease, there will be a shift to the left.

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  • Weather: Droughts for example will reduce supply for agriculture markets for obvious reasons, shift to the left. If there are good weather conditions the supply for agriculture markets will increase, shift to the right.

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  • Future Price expectations: if firms expect  prices for their products to rise they may withhold some supply from the market for the future. Curve shift left. If firms expect prices to fall, they will increase supply for current price to make as much profit. Shift to right.

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  • Goods in joint supply: such goods are those that are made from the same raw materials, ex, lamb and sheepskin. If the price for lamb meat  increases, the supply for it will increase. Along with it the supply for sheepskin will also increase. As suppliers might as well use the leftover materials to produce more goods. Supply shifts to the right. Vice versa.

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  •  Producer substitutes: This refers to when suppliers produce goods that require the same resources, like farmers can only produce one crop at a time. A farmer can only grow wheat or potatoes at a time , if the prices of potatoes increase the supply for them will extend, meaning more resources are being used for potatoes(land, labour) than for wheat. Hence wheat supply reduces, shift to left. Vice  versa.

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  • The non price determinants just like in demand cause a shift in the supply curve. Refer to unit 2.1 notes to see how to draw shifts in supply curve.

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