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 Supply means the quantities of goods and
services made available for sale at a fixed
price in a fixed period of time. This fixed
period of time depends upon the nature of
goods and may be a day, a week, a month, a
year and more. Fixed price indicates the cost
of production and a normal profit.
 In economics, free goods are not included in
supply. The availability of goods will be
known as supply only when income is earned
from sale.
 On the other hand, if the goods are produced
and are kept for self-use, then also it may not
be called supply. Therefore, the lists of goods
which are brought to the market for sale at
different prices are known as the supply.
 There is direct relationship between the price
of a commodity and its quantity offered for
sale over a specified period of time.
When the price of a goods rises, quantity
supplied increases and as price falls, the
quantity supplied of goods and services
decreases. This relationship between price
and the quantities which suppliers are
prepared to offer for sale is called the law of
supply. (Ceteris paribus)
Px 4 3 2 1
Qx
S 100 80 60 40
 In the figure price is plotted on the vertical
axis OY and the quantity supplied on the
horizontal axis OX. The four points d, c, b,
and a show each price quantity combination.
The supply curve S S’/ slopes upward from
left to right indicating that less quantity is
offered for sale at lower price and more at
higher prices by the sellers not supply curve
is usually positively sloped.
 1. Individual supply schedule
 2. Market supply schedule
Individual Supply schedule:
An individual supply schedule represents the
price quantity combination for a single seller.
Market supply schedule:
The market supply schedule represents the
price-quantity combinations for all sellers of a
particular good. The market supply curve is the
horizontal summation of all individual supply
curves.
 Shifts in supply curve means changes in
supply. While explaining the law of supply, we
have stated that that other things remaining
the same (ceteris paribus) the amount of the
commodity offered for sale increases with the
rise in price and decreases with a fall in price.
When there is an increase in supply due to
one or more than one non-price factor (which
was held constant) such as production
techniques, resource prices, changes in the
price of other commodities, etc., there is a
rise in supply.
 The entire supply curve shifts to the right of
original supply curve indicating that more
quantity is offered for sale at the same price per
time period. If due to one or a combination of
non-price factors, less quantity is brought into
the market for sale at each price, the supply is
said to have fallen. In case of fall in supply, the
supply curve shifts to the left of the original
supply curve. The rise and fall of supply curve
(shifts in supply curve) is explained with the help
of an imaginary schedule and a diagram.
Price per shirt
(Dollars )
Original quantity
Supplied per
Week
Rise in supply Fall in supply
50 200 320 140
40 160 200 100
30 100 150 70
20 39 100 15
 Changes in factor price. The rise of fall in supply may take
place due to changes in the cost of production of a
commodity. If the prices of various factor of production
used in the production of a particular commodity increase
of it total cost of production. There will be reduction in the
supply of that commodity at each price because the
amount demanded decreases with a rise in price.
Conversely, if the prices of the various factors of
production fall down, it will result in lowering the cost of
production and so an increase in the supply on varying
prices.
 Changes in technique. The supply of a commodity may also
be affected by progress in technique. If an improvement in
technique takes place in a particular industry, it will help in
reducing its cost of production. This will result in greater
production and so an increase in the supply of the
commodity. The supply curve will shifts to the right of the
original supply curve.
 Improvement in the means of transport. The supply
of the commodity may also increase due to
improvement in the means of communication and
transport. If the means of transport is cheap and fast,
then supply of the commodity can be increased at a
short notice at lower price.
 Climatic changes in case of agricultural products. The
supply of agricultural products is directly affected by
the weather conditions and the use of the better
methods of production. If rain is timely plentiful well-
distributed; and improve methods of cultivation are
employed then other things remaining the same,
there will be bumper crops. It would then be possible
to increase the supply of the agriculture products.
 Political changes. The increase or decrease in supply may
also place due to political disturbances in a country. If
country wages wars against another country or some kind
of political disturbances take place just as we had at the
time of partition, then the channels of production are
disorganized. It results in the decrease of certain goods
the supply curve shifts to the left of originals curve.
 Taxation policy. If a government levies heavy taxes on the
import of particular commodities, then the supply of these
commodities is reduced at each price. The supply curve
shifts to the left .conversely if the taxes on output in the
country are low and government encourages the import of
foreign commodities, then the supply can be increased
easily. The supply curve shifts to the right of originals
supply curve.
 The subsidies. Monetary assistance granted
by a government to a person or group in
support of an enterprise regarded as being in
the public interest. They normally take form
of payments to producers. Usually in the case
of agricultural products like coffee.
 Goals of firms. If the firms expect higher
profits in the future, they will take the risk
and produce goods on large scale resulting in
larger supply of the commodities. The supply
curve shifts to the right.
 Meaning
Market equilibrium is a market state where
the supply in the market is equal to the
demand in the market (supply = demand). At
this point, there is no tendency for prices to
change. The equilibrium price is the price of a
good or service when the supply of it is equal
to the demand for it in the market. It is
denoted by E.
Price of Soft Drink in US $ Quantity Demanded of Soft
drinks
Quantity Supplied of Soft
drinks
2 40 0
4 30 10
6 20 20
8 10 30
10 0 40
 In above figure 1 you will find that the supply
and demand curves are intersecting to each
other at Price = $6, and Quantity = 20. In this
market, the equilibrium price is $6 per unit,
and equilibrium quantity is 20 units. At this
price level, market is in equilibrium. Quantity
supplied is equal to quantity demanded ( Qs =
Qd).
 A Market Surplus occurs when there is excess supply-
that is quantity supplied is greater than quantity
demanded. In this situation, some producers won't
be able to sell all their goods. This will induce them
to lower their price to make their product more
appealing. In order to stay competitive many firms
will lower their prices thus lowering the market price
for the product. In response to the lower price,
consumers will increase their quantity demanded,
moving the market toward an equilibrium price and
quantity. In this situation, excess supply has exerted
downward pressure on the price of the product.
Market surplus is always above the equilibrium price
because quantity supplied is greater than quantity
demanded (Qs>Qd).
 Suppose price is P1 in the graph below, only Q1
will be sold because this is all that buyers will
purchase, even though sellers are willing to sell
more, Q2. The difference Q2 - Q1 is called a
surplus. In this situation the buyers are in
equilibrium because they can buy all they want to
buy at the going price. However, the sellers are
not in equilibrium and will compete among
themselves to get rid of the surplus. Some sellers
will be willing to offer their product at a lower
price. Buyers are always willing to move down the
demand curve, so there is a tendency to move
downward toward market equilibrium in the
graph.
 A Market Shortage occurs when there is excess
demand- that is quantity demanded is greater than
quantity supplied. In this situation, consumers won't
be able to buy as much of a good as they would
like. In response to the demand of the consumers,
producers will raise both the price of their product
and the quantity they are willing to supply. The
increase in price will be too much for some
consumers and they will no longer demand the
product. Meanwhile the increased quantity of
available product will satisfy other
consumers. Eventually equilibrium will be reached.
Market shortage is always below the equilibrium price
because quantity demanded is greater than quantity
supplied (Qd>Qs).
 Suppose price is P1 in the graph below, only Q1
will be sold even though buyers would like to buy
Q2. The difference Q2 - Q1 represents a
shortage. The sellers are in equilibrium in this
situation because they can sell everything they
want to sell at this price, but buyers are not.
Some buyers who cannot obtain the product are
willing to offer more, and sellers are always
willing to accept a higher price. Therefore, the
actions of the buyers, as they compete with each
other to obtain the amount that is available, drive
the price upward in this model toward market
equilibrium.
 Equilibrium price and quantity are determined
by the intersection of supply and demand. A
change in supply, or demand, or both, will
necessarily change the equilibrium price,
quantity or both. It is highly unlikely that the
change in supply and demand perfectly offset
one another so that equilibrium remains the
same.
 This example is based on the assumption of
Ceteris Paribus(all things are remaining
constant).
PRICE (RWF) QD QD1 QUANTITY
SUPPLIED
700 0 200 1000
600 100 300 900
500 200 400 800
400 300 500 700
300 400 600 600
200 500 700 500
100 600 800 400
 There are four basic causes of a change in equilibrium price
and quantity:
Demand shifts to the right : An increase in demand shifts
the demand curve to the right, and raises equilibrium price
and equilibrium output.
 An decrease in demand shifts the demand
curve to the left, and reduce equilibrium price
and equilibrium output.
 An increase in supply shifts the supply curve
to the right, which reduces price and
increases output.
 A decrease in supply shifts the supply curve
to the left, which raises price but reduces
output.
Theory of supply

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Theory of supply

  • 1.
  • 2.  Supply means the quantities of goods and services made available for sale at a fixed price in a fixed period of time. This fixed period of time depends upon the nature of goods and may be a day, a week, a month, a year and more. Fixed price indicates the cost of production and a normal profit.  In economics, free goods are not included in supply. The availability of goods will be known as supply only when income is earned from sale.
  • 3.  On the other hand, if the goods are produced and are kept for self-use, then also it may not be called supply. Therefore, the lists of goods which are brought to the market for sale at different prices are known as the supply.
  • 4.  There is direct relationship between the price of a commodity and its quantity offered for sale over a specified period of time. When the price of a goods rises, quantity supplied increases and as price falls, the quantity supplied of goods and services decreases. This relationship between price and the quantities which suppliers are prepared to offer for sale is called the law of supply. (Ceteris paribus)
  • 5. Px 4 3 2 1 Qx S 100 80 60 40
  • 6.  In the figure price is plotted on the vertical axis OY and the quantity supplied on the horizontal axis OX. The four points d, c, b, and a show each price quantity combination. The supply curve S S’/ slopes upward from left to right indicating that less quantity is offered for sale at lower price and more at higher prices by the sellers not supply curve is usually positively sloped.
  • 7.  1. Individual supply schedule  2. Market supply schedule Individual Supply schedule: An individual supply schedule represents the price quantity combination for a single seller. Market supply schedule: The market supply schedule represents the price-quantity combinations for all sellers of a particular good. The market supply curve is the horizontal summation of all individual supply curves.
  • 8.  Shifts in supply curve means changes in supply. While explaining the law of supply, we have stated that that other things remaining the same (ceteris paribus) the amount of the commodity offered for sale increases with the rise in price and decreases with a fall in price. When there is an increase in supply due to one or more than one non-price factor (which was held constant) such as production techniques, resource prices, changes in the price of other commodities, etc., there is a rise in supply.
  • 9.  The entire supply curve shifts to the right of original supply curve indicating that more quantity is offered for sale at the same price per time period. If due to one or a combination of non-price factors, less quantity is brought into the market for sale at each price, the supply is said to have fallen. In case of fall in supply, the supply curve shifts to the left of the original supply curve. The rise and fall of supply curve (shifts in supply curve) is explained with the help of an imaginary schedule and a diagram.
  • 10. Price per shirt (Dollars ) Original quantity Supplied per Week Rise in supply Fall in supply 50 200 320 140 40 160 200 100 30 100 150 70 20 39 100 15
  • 11.
  • 12.  Changes in factor price. The rise of fall in supply may take place due to changes in the cost of production of a commodity. If the prices of various factor of production used in the production of a particular commodity increase of it total cost of production. There will be reduction in the supply of that commodity at each price because the amount demanded decreases with a rise in price. Conversely, if the prices of the various factors of production fall down, it will result in lowering the cost of production and so an increase in the supply on varying prices.  Changes in technique. The supply of a commodity may also be affected by progress in technique. If an improvement in technique takes place in a particular industry, it will help in reducing its cost of production. This will result in greater production and so an increase in the supply of the commodity. The supply curve will shifts to the right of the original supply curve.
  • 13.  Improvement in the means of transport. The supply of the commodity may also increase due to improvement in the means of communication and transport. If the means of transport is cheap and fast, then supply of the commodity can be increased at a short notice at lower price.  Climatic changes in case of agricultural products. The supply of agricultural products is directly affected by the weather conditions and the use of the better methods of production. If rain is timely plentiful well- distributed; and improve methods of cultivation are employed then other things remaining the same, there will be bumper crops. It would then be possible to increase the supply of the agriculture products.
  • 14.  Political changes. The increase or decrease in supply may also place due to political disturbances in a country. If country wages wars against another country or some kind of political disturbances take place just as we had at the time of partition, then the channels of production are disorganized. It results in the decrease of certain goods the supply curve shifts to the left of originals curve.  Taxation policy. If a government levies heavy taxes on the import of particular commodities, then the supply of these commodities is reduced at each price. The supply curve shifts to the left .conversely if the taxes on output in the country are low and government encourages the import of foreign commodities, then the supply can be increased easily. The supply curve shifts to the right of originals supply curve.
  • 15.  The subsidies. Monetary assistance granted by a government to a person or group in support of an enterprise regarded as being in the public interest. They normally take form of payments to producers. Usually in the case of agricultural products like coffee.  Goals of firms. If the firms expect higher profits in the future, they will take the risk and produce goods on large scale resulting in larger supply of the commodities. The supply curve shifts to the right.
  • 16.  Meaning Market equilibrium is a market state where the supply in the market is equal to the demand in the market (supply = demand). At this point, there is no tendency for prices to change. The equilibrium price is the price of a good or service when the supply of it is equal to the demand for it in the market. It is denoted by E.
  • 17. Price of Soft Drink in US $ Quantity Demanded of Soft drinks Quantity Supplied of Soft drinks 2 40 0 4 30 10 6 20 20 8 10 30 10 0 40
  • 18.
  • 19.  In above figure 1 you will find that the supply and demand curves are intersecting to each other at Price = $6, and Quantity = 20. In this market, the equilibrium price is $6 per unit, and equilibrium quantity is 20 units. At this price level, market is in equilibrium. Quantity supplied is equal to quantity demanded ( Qs = Qd).
  • 20.  A Market Surplus occurs when there is excess supply- that is quantity supplied is greater than quantity demanded. In this situation, some producers won't be able to sell all their goods. This will induce them to lower their price to make their product more appealing. In order to stay competitive many firms will lower their prices thus lowering the market price for the product. In response to the lower price, consumers will increase their quantity demanded, moving the market toward an equilibrium price and quantity. In this situation, excess supply has exerted downward pressure on the price of the product. Market surplus is always above the equilibrium price because quantity supplied is greater than quantity demanded (Qs>Qd).
  • 21.
  • 22.  Suppose price is P1 in the graph below, only Q1 will be sold because this is all that buyers will purchase, even though sellers are willing to sell more, Q2. The difference Q2 - Q1 is called a surplus. In this situation the buyers are in equilibrium because they can buy all they want to buy at the going price. However, the sellers are not in equilibrium and will compete among themselves to get rid of the surplus. Some sellers will be willing to offer their product at a lower price. Buyers are always willing to move down the demand curve, so there is a tendency to move downward toward market equilibrium in the graph.
  • 23.  A Market Shortage occurs when there is excess demand- that is quantity demanded is greater than quantity supplied. In this situation, consumers won't be able to buy as much of a good as they would like. In response to the demand of the consumers, producers will raise both the price of their product and the quantity they are willing to supply. The increase in price will be too much for some consumers and they will no longer demand the product. Meanwhile the increased quantity of available product will satisfy other consumers. Eventually equilibrium will be reached. Market shortage is always below the equilibrium price because quantity demanded is greater than quantity supplied (Qd>Qs).
  • 24.
  • 25.  Suppose price is P1 in the graph below, only Q1 will be sold even though buyers would like to buy Q2. The difference Q2 - Q1 represents a shortage. The sellers are in equilibrium in this situation because they can sell everything they want to sell at this price, but buyers are not. Some buyers who cannot obtain the product are willing to offer more, and sellers are always willing to accept a higher price. Therefore, the actions of the buyers, as they compete with each other to obtain the amount that is available, drive the price upward in this model toward market equilibrium.
  • 26.  Equilibrium price and quantity are determined by the intersection of supply and demand. A change in supply, or demand, or both, will necessarily change the equilibrium price, quantity or both. It is highly unlikely that the change in supply and demand perfectly offset one another so that equilibrium remains the same.
  • 27.  This example is based on the assumption of Ceteris Paribus(all things are remaining constant). PRICE (RWF) QD QD1 QUANTITY SUPPLIED 700 0 200 1000 600 100 300 900 500 200 400 800 400 300 500 700 300 400 600 600 200 500 700 500 100 600 800 400
  • 28.  There are four basic causes of a change in equilibrium price and quantity: Demand shifts to the right : An increase in demand shifts the demand curve to the right, and raises equilibrium price and equilibrium output.
  • 29.  An decrease in demand shifts the demand curve to the left, and reduce equilibrium price and equilibrium output.
  • 30.  An increase in supply shifts the supply curve to the right, which reduces price and increases output.
  • 31.  A decrease in supply shifts the supply curve to the left, which raises price but reduces output.