# Supply Function

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Category: Education

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### Market Supply:

Market Supply The Supply of a good or service is defined as : Quantities of a good or service that people are ready to sell at various prices within some given time period, other factors besides price held constant. Supply is always referred to in relation to price and time. Supply is what a seller is able and willing to offer for sale.

### Supply and Stock:

Supply and Stock Supply and stock are related but distinct terms: Supply Comes Out of Stock: Supply is the amount of stock offered for sale at a given price. Thus , stock is the basis of supply. Stock Determines the Potential Supply : Actual supply, is the stock or quantity really offered for sale by the seller at a particular price during a certain period. Stock is the outcome of Production : By increasing the production, the stock can be increased as well as the potential supply.

### The Determinants of Supply:

The Determinants of Supply Price The cost Factors of Production The State of Technology Factors outside the Economic Sphere Tax and Subsidy Prices of other goods or services offered by the seller Future Expectations Number of Sellers

### Supply Function.:

Supply Function. In Supply function, the determinants of supply can be summarized as under: Sx = f( Px , Pf, …………., Pz , O, T, t,s ) Where Sx = the supply of commodity X Px =The price of X Pf = The set prices of the factor inputs employed for producing X. O = Factors outside the economic sphere T= Technology used t= tax S=subsidy

### Law of Supply:

Law of Supply The law of supply suggests that the supply varies directly with the changes in price. So, a larger amount is supplied at a higher price than at a lower price in the market. A decrease in the price of a good, all other things held constant, will cause a decrease in the quantity supplied of the good. An increase in the price of a good, all other things held constant, will cause an increase in the quantity supplied of the good.

### Assumptions:

Assumptions Cost of Production is Unchanged. No change in Technique of Production Fixed Scale of Production Government Policies are Unchanged No change in Transport Costs No Speculation The Prices of other Goods are help Constant.

### Exceptions to the Law of Supply:

Exceptions to the Law of Supply Generally the law of supply says that supply rises when price rises which is a universal phenomenon. But they are certain exceptions : i) PRESTIGE VALUE Goods ( or ) ANTIQUE Goods They are certain goods which can’t be produced as they are historical goods. For this goods if prices rises the supply can’t increase. ii) SUPPLY of LABOUR and SAVING It is observed that always if the wages of labour increase after certain extent, then the labour supply which is in terms of labour hour the work is willing to work only less hours.

### Change in Quantity Supplied:

Change in Quantity Supplied

### Cause for Change in Supply:

Cause for Change in Supply Cost of Production Supply also Depends on Natural Factors Change in Technique of Production Change in Input Prices Change in the Number of Sellers Policy of Govt also Influences Supply. Development of Transport Business combines

### Change in Supply:

Change in Supply Quantity Price P 0 Q2 Q An increase in supply refers to a rightward shift in the market supply curve. A decrease in supply refers to a leftward shift in the market supply curve. Q1 D D2 D1

### Market Equilibrium:

Market Equilibrium Equilibrium is a position of rest characterized by the absence of change. Market equilibrium is determined at the intersection of the market demand curve and the market supply curve. The Equilibrium price causes quantity demanded to be equal to quantity supplied .

### Slide 12:

Equilibrium When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding. As you can see on the chart, equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity. In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relation to fluctuations in demand and supply.

### Slide 13:

Disequilibrium occurs whenever the price or quantity is not equal to P* or Q*. 1. Excess Supply If the price is set too high, excess supply will be created within the economy and there will be allocative inefficiency. At price P1 the quantity of goods that the producers wish to supply is indicated by Q2. At P1, however, the quantity that the consumers want to consume is at Q1, a quantity much less than Q2. Because Q2 is greater than Q1, too much is being produced and too little is being consumed. The suppliers are trying to produce more goods, which they hope to sell to increase profits, but those consuming the goods will find the product less attractive and purchase less because the price is too high. DISEQUILIBRIUM Excess Supply Excess Demand

### Slide 14:

Excess demand is created when price is set below the equilibrium price. Because the price is so low, too many consumers want the good while producers are not making enough of it. In this situation, at price P1, the quantity of goods demanded by consumers at this price is Q2. Conversely, the quantity of goods that producers are willing to produce at this price is Q1. Thus, there are too few goods being produced to satisfy the wants (demand) of the consumers. However, as consumers have to compete with one other to buy the good at this price, the demand will push the price up, making suppliers want to supply more and bringing the price closer to its equilibrium. 2. Excess Demand

### Changes in the Market Equilibrium - Relationship between Demand, Supply, Price and Quantity:

Changes in the Market Equilibrium - Relationship between Demand, Supply, Price and Quantity Price in Rs Demand in Units Supply in Units State of Market Pressure on Price 30 5 25 D > S P 25 10 20 D > S P 20 15 15 D = S Neutral 10 20 10 S > D P 5 30 5 S > D P

### Changes in the Market Equilibrium - Relationship between Demand, Supply, Price and Quantity:

Changes in the Market Equilibrium - Relationship between Demand, Supply, Price and Quantity Quantity Price P 0 Q 0 D 0 S 0 Q 1 P 1 D 1 An increase in demand will cause the market equilibrium price and quantity to increase.

### Slide 17:

Quantity Price P 1 Q 1 S 0 Q 0 P 0 D 0 D 1 A decrease in demand will cause the market equilibrium price and quantity to decrease. Changes in the Market Equilibrium - Relationship between Demand, Supply, Price and Quantity

### Changes in the Market Equilibrium - Relationship between Demand, Supply, Price and Quantity:

Quantity Price P 0 Q 0 D 0 S 0 Q 1 P 1 An increase in supply will cause the market equilibrium price to decrease and quantity to increase. S 1 Changes in the Market Equilibrium - Relationship between Demand, Supply, Price and Quantity

### Changes in the Market Equilibrium - Relationship between Demand, Supply, Price and Quantity:

Quantity Price P 1 Q 1 D 0 Q 0 P 0 A decrease in supply will cause the market equilibrium price to increase and quantity to decrease. S 1 S 0 Changes in the Market Equilibrium - Relationship between Demand, Supply, Price and Quantity

### ELASTICITY OF SUPPLY & ITS TYPES:

ELASTICITY OF SUPPLY & ITS TYPES Elasticity of supply shows the relationship between the change in the quantity supplied due to the change in the price. Five types: Perfectly Elastic Supply (ES = infinity) Zero Elastic Supply (ES = 0) Unitary Elastic Supply (ES = 1) Relatively Elastic Supply (ES > 1) Relatively Inelastic supply (ES < 1)