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# 4 supply theory

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### 4 supply theory

1. 1. Theory of Supply Supply refers to the quantity of the commodity which the producer is willing to sell at a particular price during a particular time period.
2. 2. Supply and Stock Stock of a commodity is the total quantity that is available in the market at a certain time. Supply is that part of the stock which a seller is ready to sell at a certain price during a certain time. Thus, supply is the part of stock which is actually brought into the market.
3. 3. Supply and Quantity Supplied • Supply – it refers to the whole set of quantities of a commodity offered for sale at different levels of prices at a point of time. • Quantity Supplied – it refers to a particular amount of commodity offered for sale at a particular price at a point of time.
4. 4. Factors determining Supply & Supply Function • Sx = f (Px, PZ, NF, T, PF, Ex , GP) Sx = Supply of commodity X Px = Price of commodity X PZ= Price of related goods NF = Number of Firms T = Technological changes PF = Price of factors of production EX = Expected Future Price GP = Government Policy
5. 5. Supply and Prices of Related Goods • A fall in the price of a related good say Y, leads to a rise in the quantity supplied of good X and vice versa.
6. 6. Supply and Number of Firms • Increase in the number of firms in the market implies increase in supply and vice versa.
7. 7. Supply and Technological Change • Improvement in the technique of production reduces cost of production. This leads to increase in profit and hence an increase in supply.
8. 8. Supply and Price of Factors of Production • If the factor price reduces, cost of production also reduces and supply increases and vice versa.
9. 9. Supply and Expected Future Price • If the producer expects the price of the commodity to increase in near future, current supply of the commodity would reduce and vice versa.
10. 10. Supply and Government Policy • Increase in Taxation tends to reduce the supply while increase in Subsidy tends to induce greater supply of the commodity.
11. 11. Law of Supply There is a direct relationship between the price of a commodity and the quantity supplied of that commodity. Sx = f (Px), ceteris peribus where, Sx = quantity supplied of good X Px = price of the good X Price Quantity
12. 12. Assumptions of Law of Supply * Price of related goods is constant * Number of firms is constant. * Technology remain unchanged. * Price of factors of production remains same. * There is no change in the goal of the firm. * Expected future price remains unchanged. * Government policy is constant
13. 13. Exceptions to the Law of Supply • It does not apply strictly to agricultural products whose supply is governed by natural factors. Due to natural calamities the supply of wheat will not increase however high its price may soar. • Goods of social distinction will remain limited even if their price may rise. • Sellers may be willing to sell more units of perishable goods although their price may be falling.
14. 14. Supply Schedule and Supply Curve Supply Schedule : It’s a tabular representation showing the different quantities of a good that the producers are willing to sell at different levels of prices during a given period of time. Price (\$ per Kg) Quantity Supplied of Good X Ref Pt 1 10 A 2 20 B 3 30 C 4 40 D
15. 15. Supply Curve The graphical representation of the supply schedule is supply curve.
16. 16. Individual Supply and Market Supply • Individual Supply :It means quantity supplied of a good by an individual producer at various prices per time period. • Market Supply :It is the aggregate of the quantities supplied by all producers in the market at different prices per time period.
17. 17. Deriving a Market Supply Schedule
18. 18. Deriving a Market Supply Curve
19. 19. RECAP - Factors determining Supply & Supply Function • Sx = f (Px, PZ, NF, T, PF, Ex , GP) Sx = Supply of commodity X Px = Price of commodity X PZ= Price of related goods NF = Number of Firms T = Technological changes PF = Price of factors of production EX = Expected Future Price GP = Government Policy
20. 20. Supply and Prices of Related Goods Price price S S1 S1 O S O Quantity supplied (a) Fall in the price of substitute Quantity supplied (b) Rise in the price of substitute
21. 21. Supply and Technology Price price S1 S S O S1 O Quantity supplied with an unfavourable change in technology Quantity supplied with an advancement in technology
22. 22. Supply and Price of Factors of Production Price price S1 S S O S1 O Quantity supplied with higher cost of production Quantity supplied with lower cost of production
23. 23. Supply and Government Policy Price price S1 S S O S1 O Quantity supplied with an increase in excise tax Quantity supplied with an increase in subsidy
24. 24. Change in Quantity Supplied (movement) vs. Change in Supply (shift) • Change in Quantity Supplied / Movement along the supply curve It is caused by the change in the price of good other things remaining constant. * Expansion of Supply : It refers to rise in supply due to the fall in price of the good. * Contraction of Supply : It refers to fall in supply due to the rise in price of the good.
25. 25. Contd. Expansion of Supply Price Contraction of Supply Price S S P1 P P P1 O O Q Q1 Quantity Supplied Q1 Q Quantity Supplied
26. 26. Contd. • Shift / Increase or Decrease in Supply It is caused by changes in factors other than price of the good like price of substitute goods; change in technology; Change in cost of production; change in government policy etc.
27. 27. Increase in Supply It refers to more supply at a given price. It is indicated by the rightward shift in the supply curve. It is due to - decrease in the price of related goods - advanced technological change - increase in the number of firms - lower price of factors of production - Expectation of fall in price in near future - higher subsidies to the firms
28. 28. Decrease in Supply It refers to less supply at a given price. It is indicated by the leftward shift in the supply curve. It is due to - increase in the price of related goods - Use of obsolete technology - decrease in the number of firms - higher price of factors of production - Expectation of rise in price in near future - higher taxes to the firms
29. 29. Increase in Supply Price S P O Q1 Q Qx Quantity Supplied S1
30. 30. Decrease in Supply Price S1 P O Q Q 1 Qx Quantity Supplied S
31. 31. Time Factor and Supply • Very Short Time Period/ Market Period : The time period when production cannot be changed. Price O S Quantity Supplied
32. 32. Time Factor and Supply – contd. • Short Time Period : The time period when production can be increased through greater application of variable FOP. Price O S Quantity Supplied
33. 33. Time Factor and Supply – contd. • Long Time Period : The time period when production can be increased through greater application of all FOP + technological advancement. Price O S Quantity Supplied
34. 34. Difference in the Causes of Shift in the Supply Curve Increase in Supply (Upward or Rightward shift in Supply) Decrease in Supply (Downward or Leftward shift in Supply) 1. Improvement in technology of production. 1. Technique of production being obsolete. 2. Fall in the price of related goods. 2. Rise in the price of related goods. 3. Fall in price of factors of production. 3. Rise in price of factors of production. 4. Fall in excise tax. 4. Rise in excise tax. 5. Higher subsidy. 5. Lower or no subsidy. 6. Increase on number of firms. 6. Decrease on number of firms. 7. Expectation of fall in price in near future. 7. Expectation of rise in price in near future.
35. 35. Difference between Increase in Supply and Expansion of Supply Increase in Supply •It refers to shift in supply curve. •There is a rightward shift in the supply curve. •It is due to:- decrease in the price of related goods - advanced technological change - increase in the number of firms - lower price of factors of production - Expectation of fall in price in near future - higher subsidies to the firms Expansion of Supply •It refers to movement along a supply curve. •The producers move to the right on the same supply curve. •It is due to the rise in the price of the commodity.
36. 36. Contd. Increase in Supply Expansion of Supply •It is defined as a rise in supply at the same price of a commodity. •Graphical presentation:- •It is defined as rise in supply due to rise in price of the commodity. • Graphical Presentation :- Price Price P1 S S1 S P P O Q Q1 Quantity •Numerical example:Px Qx 5 5 90 100 O Q Q1 Quantity •Numerical Example :Px Qx 5 6 90 100
37. 37. Difference between Decrease in Supply and Contraction of Supply Decrease in Supply •It refers to shift in supply curve. •There is a leftward shift in the supply curve. •It is due to:- increase in the price of related goods - Use of obsolete technology - decrease in the number of firms - higher price of factors of production - Expectation of rise in price in near future - higher taxes to the firms Contraction of Supply •It refers to movement along a supply curve. •The producers move to the left on the same supply curve. •It is due to the fall in the price of the commodity.
38. 38. Contd. Decrease in Supply Contraction of Supply •It is defined as a fall in supply at the same price of a commodity. •Graphical presentation:- •It is defined as fall in supply due to fall in price of the commodity. • Graphical Presentation :- Price Price P S1 S S P P1 O Q1 O Q Q1 Quantity Quantity •Numerical example:Px Qx 5 5 90 80 Q •Numerical Example :Px Qx 5 3 90 80