supply Function and price equilibrium

1. Supply Function
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2. Supply
It is the part of stock of a product
which is offered for sale at a given
price during a given period of time
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3. Supply
Quantity Supplied
Price
Plotting the combination of quantity supplied at a given
price.
Q
P
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4. Supply Determinants
1. Quantity of supply of product x (Sx).
2. Price of product x (Px).
3. Prices of factors of production (PF).
4. Prices of related goods (PY).
5. Technology (T).
6. Taxes (t).
7. Subsidies (s).
8. External factors like season, weather, natural
calamities. (Ex).
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5. Supply Function
Sx = f(Px, PF, PY,T, t, s, E)
Where
Sx = Quantity of supply of product x
Px = Price of product x
PF = Prices of factors of production
PY = Prices of related goods.
T = Technology
t = Taxes
s = Subsidies
E = External factors like season, weather, natural calamities, etc.
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6. Law of Supply
The law of supply gives the positive relationship
between supply of a product and its price. It states
as follows.
 As the price increases, the sellers supply larger
quantity
 As the price decreases, the sellers supply less
quantity.
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7. Assumptions of law of supply
1) No change in cost of production
2) No change in Related products’ price
3) No change in technology
4) No change in scale of production
5) No change in government policies
6) No change in external factors
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8. Price Demand Schedule
 It is the schedule of the changes in quantity of a product
demanded at different prices. Below is the demand schedule
of bananas.
# Quantity in
dozen
Price per
dozen
1 5 200
2 4 160
3 3 125
4 2 100
5 1 75
6 ½ 50
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9. Supply Curve
It shows the relationship between price and quantity
supply at a given point of time holding everything
else constant. The curve shows the positive
relationship between price of the product and
quantity supplied. This is known as positive slope.
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10. Supply Curve
The movements along supply curve are as follows.
 A rise in price causes upward movement along a
given demand curve.
 A price decline causes downward movement
along a given demand curve.
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11. Supply Curve
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Quantity Supplied
Price
P0
Q0
P1
Q1
Positive Slope: With an increase
in product price is results in
increase of the quantity supplied.
P2
Q2

12. ELASTICITY OF Supply
 It is the measure of the degree of change in the supply for
a product, in response to a give change in the price of the
product and other factors in determining supply.
 Law of supply shows the direction of the demand in
response to price change whereas, elasticity of supply gives
the extent of change in supply for the given change in the
pricing and othr supply influencing factors.
 Price elasticity of supply is measured by comparing
proportionate change in supply and Proportionate change in
price.
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13. Types of elasticity based on supply determinants
1. Price Elasticity (EP)
EP = Proportionate change in quantity supplied
Proportionate change in price
2. Factor Elasticity (EI)
EF = Proportionate change in quantity demand
Proportionate change Factors of Production
3. Cross Elasticity (EC)
EC = Proportionate change in quantity demanded
Proportionate change in other products’ price
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14. Types of supply elasticity based on the price
1. Relatively Elastic : E>1
2. Relatively Inelastic: E<1
3. Unitary Elastic : E=1
4. Perfectly Elastic : E=∞
5. Perfectly Inelastic : E=0
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15. Business and Supply Function
 All business entities rely on preparing supply schedules and
demand curves for their own products as well as their
competitors products to know where they stand in business
 Historic demand analysis is the base for future sales.
 Demand forecasting is done by all business houses to
accommodate themselves in terms of future product
readiness and distribution of the same.
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16. Equilibrium
 Demand and price are inversely related
 Supply and price are directly related
 Demand function and supply function move in opposite
direction.
 Equilibrium is attained between supply and demand
functions and slopes.
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17. Demand and supply curves
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Quantity
Price
S0
Q0
S1
Q2
Positive Slope
S2
Q1
S0
Q0
S1
Q2
S2
Q1
Quantity
Negative Slope
Price

18. Equilibrium
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Quantity
Price
P0
Q0
P1
Q1
P2
Q2

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