DPB 10013 MICROECONOMICS (SUPPLY THEORY)

DPB 10013 : MICROECONOMICS
CHAPTER 2 : SUPPLY

 The ability and willingness to sell or produce
a particular product and service in a given
period of time at a particular price, Ceteris
paribus .
 Supply schedule for a product is the list of
quantity supplied at different prices
assuming all other influences are constant.
 The table above shows the quantity supplied
at each price level.
Chapter 2:DEMAND AND SUPPLY THEORY

Px ( RM ) 5 4 3 2 1
Qx ( unit ) 100 80 60 40 20
Table 3.1: Firm supply

Px ( RM ) 5 4 3 2 1
Qx ( unit ) 100 80 60 40 20

 Individual supply – the relationship between
the quantity of a product supplied by a single
seller and its price.
 Market supply – the relationship between the
total quantity of a product supplied by
adding all the quantities supplied by all
sellers in the market and its price.

Price X
(RM )
Quantity of supply ( unit ) Market
supply ( S )Firma A Firma
B
Firma
C
5 12 16 20 48
4 9 12 18 39
3 7 9 16 32
2 5 6 14 25
1 0 2 12 14
Table 3.2: Market supply

Figure 3.2 : Supply curve firm A

Figure 3.3 : Supply curve firm B.

Figure 3.4 : Supply curve firm C.

Figure 3.5 : Market supply curve.

Law of supply
 The law of supply states that
i. the higher the price of a product, the greater of the quantity
supplied of that product and
ii. the lower the price of a product, the lower of the quantity supplied,
ceteris paribus.
 Positive relationship between price and quantity of supply
 Other factors is constant
Supply function
Qs = a + bP

 Supply function
 Illustrates the relationship between quantity supply
and price in a mathematical form.
Qs =a + bP
Where;
Qs = the quantity of the supply goods(units)
a = the quantity of the supply goods when the price
(P) is zero. This value is intersect the quantity axis
b = the gradient of the supply curve
(a & b is variable)
P = the price of the goods

Price
(RM) 1 2 3 4 5
Quantity
(Kg) 30 50 70 90 110
Table 3.3: Firm supply of shoes

Figure 3.6: Relationship between Price and Qs.

1. Price of goods
2. Price of related goods (Substitute
goods,complementary goods)
3. Level of technology
4. Production cost
5. Speculation
6. Government policies
7. Weather
8. Producer goals and expectations
9. Number of producer

 Supply function
Qs = a + bP
 Example 1:
P 2 4 (i) 6( ii) 8 10
Qs 30 40 50 60 70
Table 3.3: supply of shoes

 solution:
Step 1:
Qs = a + bP
Step 2:
i. 40 = a + 4b
ii. 50 = a + 6b
Equation (i) – (ii)
40 - 50 = (a- a) + (4b – 6b)
-10 = -2b
b = 10 / 2
b = 5

 Step 3:
Sub b = 5 in equation (i)
i. 40 = a + 4b
40 = a + 4 (5)
40 - 20 = a
20 = a
Beside that;
Qs = a + bP
Qs = 20 + 5P#

 Step 4: Check answer
Qs = 20 + 5P#
Equation (ii)
ii. 50 = a + 5P
50 = 20 + 5(6)
50 = 20 + 30
50 = 50

 Example 2:
 Example 3:
 Example 4:
P 2 4 6 8 10
Qs 20 40 60 80 100
P 1 2 3 4
Qs 20 24 28 32
P 1 2 3 4
Qs 24 26 28 30
Try your best!!!

 To find the market supply curve, we need to calculate all
the supply function of each firm
 Example 5:
P Qs Ali Qs Abu Qs Amin Qs
Market
1 0 10 50 60
2 (i) 5 20 100 125
3 (ii) 10 30 150 190
4 15 40 200 255
5 20 50 250 320
Table 3.3: Market supply of umbrella

 Solution:
Step 1:
Qs = a + bP
Step 2: ALI ABU AMIN
i. 5 = a + 2b 20 = a + 2b 100 = a + 2b
ii. 10 = a + 3b 30 = a + 3b 150 = a + 3b
Equation (i) – (ii)
b = 5 b = 10 b = 50

 Step 3:
Add b = in equation (i)
5 = a + 2b 20 = a + 2b 100 = a + 2b
5 = a + 2 (5) 20 = a + 2(10) 100 = a + 2(50)
5 = a + 10 20 - 20 = a 100 - 100 = a
5 - 10 = a
a = -5 0 = a 0 = a
So, the supply of firm market is;
Qs = a + bP
ALI ABU AMIN
Qs = -5 + 5P Qs = 10P Qs = 50P

 Qd Market =
ALI = Qs = -5 + 5P
ABU = Qs = 10P
AMIN = Qs = 50P
Qs = -5 + 65P

 Example 6:
P Qs Marsha Qs Milan Qs Londoh Qs Market
2 20 50 30 100
4 40 100 60 200
6 (i) 60 150 90 300
8 (ii) 80 200 120 400
10 100 250 150 500
Table 3.2: Market supply of handbag

1. Changes in quantity supply or movement along a
supply curve
- Occurs due to the price of the goods itself
- When the price of the goods rises, the quantity
supply will increase (known as expansion of
supply)
- When the price of the goods falls, the quantity
supply will decrease (known as contraction of
supply)

A
C
B
SP
Qtty
10
5
15
200100 300
Expansion
of supply
Contraction
of supply
Figure 3.7: Changes in quantity of supply
* From figure 3.7;
i. When P rise from RM 10 to RM 15, qtty supply will increase from
200 to 300 (known as expansion of supply)
ii. When P falls from RM 10 to RM 5, qtty supply will decrease from
200 to 100 (known as contraction of supply)

ii. Changes in supply or shift in supply curve
- Occur when the supply curve shifts to the right or
left due to changes in factors other than the price
of the goods itself
- The supply curve will shift to the left when the
supply increases (known as increased supply)
- The supply curve will shift to the left when the
supply decreases (known as decreased supply).

A
C
B
SP
Qtty
10
200100 300
Figure 3.8: supply curve for coffee
* From figure 3.8;
i. When P of tea fall, the supply of tea will decrease. Because of tea and coffee is
substitute goods, the decrease of tea will result in an increased supply of coffee
ii. At price level for coffee RM 10, the supply for coffee will shift to the right from S to S1
and Qs increase from 200 to 300. (known as increased supply)
iii. When P of tea rise, the supply of tea will increase. Because of tea and coffee is
substitute goods, the increase of tea will result in an decreased supply of coffee
iv. At price level for coffee RM 10, the supply for coffee will shift to the left from S to S2
and Qs decrease from 200 to 100. (known as decreased supply)
S2
S1
decreased
supply
increased
supply

DPB 10013 MICROECONOMICS (SUPPLY THEORY)

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DPB 10013 MICROECONOMICS (SUPPLY THEORY)