BA CORE 101 BASIC MICROECONOMICS

CHAPTER 2
MICROECONOMICS
LESSON 2
The Concept of Supply

OBJECTIVES:
1. To define the concepts of supply, supply schedule, supply curve, the law of supply and
supply function.
2. To identify the different factors affecting supply.
3. To analyze changes in the supply schedule and movements along the supply curve.

A. Supply (Firms/Seller’s side)

 The supply of a product (or simply, supply) is the amount or quantity of goods or services
that producers or firms are ready and willing to sell at a given price within a period of time,
ceteris paribus or “other factors being held constant”.
 Thus, supply is a product made available for sale by firms. It should be remembered that
sellers normally sell more at a higher price than at a lower price.

B. Methods of Supply Analysis

 Supply can be measured and presented as a supply schedule, supply curve and supply
function:
A. Supply Schedule – shows, in tabular form, the various quantities of the product that
is offered to the market at various possible prices at a specific time and place.
 Generally, the information provided by a supply, schedule can be used to
construct a supply curve showing the price/quantity supply relationship in
graphical form.
Example: Table 1 presents a hypothetical supply schedule for mangoes per month.
BA CORE 101 BASIC MICROECONOMICS

Table 1
Vigan City Individual Supply Schedule for Mangoes per month
Price of Mangoes
Situation Quantity Supplied (in kg)
(per kg)
A P 45 180
B P 40 150
C P 35 120
D P 30 90
E P 25 60
F P 20 30
The table shows the various prices and quantities for the supply for
mangoes per month. For instance, at a given price of P 45.00 the seller is willing to
sell 180 kilograms of mangoes (situation A); however, at a price of P 20, he is willing
to sell 5 kilograms of rice (situation E).
 Observe that as price increases quantity supplied also increases. Note that
high prices provide incentives to sellers to sell more because of the expected
increase in their profits. However, when prices decline, these become a
disincentive on the sellers to sell more goods and services in the market
since their profits will be low.
B. Supply Curve – it is a graphical representation or illustration of the supply schedule.
The typical market supply curve for a product slopes upward from left to right
indicating that as price rises (or fall) more (or less) is supplied. The upward slope
indicates the positive relationship between price and quantity supplied. This is
illustrated in Figure 1.
Example:
Figure 1
Vigan City Market Supply Curve for Mangoes per Week
50
F
E
40 D
Price of Mangoes

C
30
(per kg0

B
A
20

10

0
0 20 40 60 80 100 120 140 160 180 200
Quantity Supplied (in kg)

Figure 1 illustrates a typical supply curve. A demand curve has a positive slope thus it
slopes upward from left to right. The upward slope indicates the direct relationship between
price and quantity supplied. The Y-axis represents price (P), while the X-axis represents the
quantity supplied (Qs). The supply curve is positively sloped or upward sloping. The (positive)
slope measures the change in quantity supplied for a unit change in price. This indicates that
BA CORE 101 BASIC MICROECONOMICS

the price of commodities increases (decreases), more (less) goods will be offered for sale by
the producers.
 Law of Supply – As the price of the product increases, keeping “other things” constant,
sellers tend to offer more to the market, and as the price of the product decreases, sellers
tend to offer less to the market.
 Hence, the law of supply explains the direct relationship of price and quantity supplied, the
law states that if the price of a good or service goes up, the quantity supplied for such good
or service or service will also go up; if the price goes down the quantity supplied will also go
down, ceteris paribus. The Law of Supply implies that higher price is an incentive for
business firms or producers to produce more goods or services as it maximize their profits.
C. Supply Function – it is a form of mathematical notation that links the dependent
variable, quantity supplied (Qs), with various independent variables which determine
quantity supplied. Among the factors that influence the quantity supplied are price of the
product, number of sellers in the market, price of factor inputs, technology, business goals,
importations, weather conditions, and government policies. Thus, we can transform our
statement in a mathematical function as follows:

Qs = f (product’s own price, number of sellers, price of factor input, technology, etc.)

Given our supply function, we can now derive our supply equation:
Qs = a + b (P)

Where: Qs = quantity supplied at a particular price

a = intercept of the supply curve
b = slope of the supply curve
P = price of the good sold

We can now illustrate our supply equation using a hypothetical example. Suppose the price
of good A is P 5.00. The intercept of the supply curve is 3 and the slope of the supply curve is 0.25. If
we want to know how much of good A will be supplied by sellers, we can simply substitute the
values in our supply equation. Thus,
Qs = a + b (P)
= 3 + 0.25 (5)
= 3 + 1.25
Qs = 4.25 units
 Example
Table 2
Demand Schedule for Candy
Situation Price (P) Quantity Supplied (Qs)
A 5 35
B 4 30
C 3 ?
D ? 20
E 1 15
F 0 10

Situation C
Given:
Qd = ?
a = 10
b=5
BA CORE 101 BASIC MICROECONOMICS

P=3
Solution:
Qd = a + bP
Qd = 10 + 5(3)
Qd = 10 + 15
Qd = 25

Situation D
Given:
Qd = 20
a = 10
b=5
P=?
Solution:
Qd = a + bP
20 = 10 + 5P
-5P = 10-20 (Transpose)
-5P = -10
-5 = -5
P=2

B. Change in Quantity Supplied vs. Change in Supply

 Change in Quantity Supplied – a change in quantity supplied occurs if there is a movement
from one point to another point along the same supply curve. A change in quantity supplied
is brought about by an increase or decrease in the product’s own price. The direction of the
movement however is positive considering the Law of Supply.
 Figure 2.1 illustrates the concept of change in quantity supplied. As you can see in this figure,
the original price is at Po and the corresponding quantity supplied is at Qo. The point of
interaction between Po and Qo is at point a along the supply curve (S). Now let us assume
that price increases to P1. As a result, quantity supplied will increase to Q1. Quantity supplied
will therefore move from point a to point b along the same supply curve because of the
increase in price of the same product. The reverse however will happen if price will
decrease. A change in quantity supplied therefore happens if the price of the good being
sold in the market changes, and this is illustrated by a movement from one point to another
point along the supply curve.
Figure 2. Change in Quantity Supplied

b
P1

a
Po

Qs
Qo Q1
BA CORE 101 BASIC MICROECONOMICS

 The figure illustrates a change in quantity supplied. Change in quantity supplied happens
when the price of the product changes, thus, resulting to a change in quantity supplied. This
is illustrated in the graph above where Po increases to P1 resulting to a change in Qo to Q1
and a movement along the same supply curve from point a to point b.
 Change in Supply – a change in supply happens when the entire supply curve shifts leftward
or rightward. At the same price, therefore, less (more) amounts of a good or service is
supplied by producers or sellers. Figure 3.1 illustrates an increase in supply. In the figure, we
can see that the entire supply curve moves rightward (indicated by the arrow) from S to S’.
We can therefore observe that the same price Po more goods will be offered for sale by
producers ( Qo to Q1.

S
P S’

Po

Qs
Qo Q1

a. Increase in Supply

 On the other hand, supply decreases if the entire supply curve shifts leftward. At the same
price, fewer amounts of a good or service are sold by producers. A decrease in supply is
illustrated in Figure 3.2. We can see in the figure that the entire supply curve shifts leftward
(indicated by the arrow) from S to S’. We can also see that at the same price Po, supply for
the product will decrease (from Qo to Q1).

S’
P S

Po

Qs
Qo Q1
b. Decrease in Supply

 Increase or decrease in supply is caused by factors other than price of the good itself such as
change in technology, business goals, etc. resulting to the movement of the entire supply
curve rightward or leftward.
BA CORE 101 BASIC MICROECONOMICS

B. Non-Price Determinants of Supply

In the discussions above, price is assumed as the most important factor affecting supply.
Observations show however that there are other factors that can and do affect supply. The “other
factors” that influence supply, known as Non-Price Determinants of Supply, are as follows:
1. Optimization in the use of factors of production
 Explanation:
 An optimization in the utilization of resources will increase supply, while a
failure to achieve such will result to a decrease in supply. Optimization in this
sense refers to the process or methodology of making or creating something as
fully perfect, functional, or effective as possible. Simply put, it is the efficient use
of resources. In business parlance, it can mean maximum production of output
at minimum cost.
 Thus optimization of the various factors of production (i.e., land, labor, capital
and entrepreneurship) results to an increase in supply and vice versa (Sicat
2003).
2. Resource Prices or Cost of production
 Explanation:
 The prices of resources used in producing goods or providing services help
determine the costs of production incurred by firms.
 Assuming a given product price, higher resource prices raise or increase the
cost of a product or service. This squeezes or pinches the profits of firms
which discourages production and therefore decreases supply.
 On the other hand, lower resource prices enable the producer to buy more
of the resources, thereby enabling the firm to produce more of the good.
3. Technological change
 Explanation:
 The introduction of cost-reducing innovations in the production technology
increases supply on one hand. On the other hand this can also decrease supply
by means of freezing the production through the problems that the new
technology might encounter, such as technical trouble (Samuelson and
Nordhaus 2004).
 Technological advances which consist of changes that lower the amount of
resources needed to produce the same quantity and quality of the product or
service increase supply.
 Example: AST Motors Corporation, which uses Machine “A” in the production of
its cars. Machine “A” can produce 20 cars per week. However, after 3 years of
production, AST Motors Corporation decided to replace Machine “A” with the
newer and faster Machine “B”, which can fully produce 80 cars per week.
Because of the introduction of this new technology (Machine “B”), the quantity
of cars supplied by AST Motors Corporation increased from 20 cars per week to
80 cars per week.
 However, if machine “B” malfunctions and such was not fixed immediately, AST
Corporation’s Production of cars would decrease and thus not meet the
optimum level of production using Machine “B”.
4. Number of Sellers or Suppliers
 Explanation:
 The number of sellers has a direct impact on quantity supplied. Simply put,
the more sellers there are in the market the greater supply of goods and
services will be available.
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 As more sellers enter an industry, more goods are produced resulting to an

increase in supply.
 In contrast, as sellers leave the industry, less goods are produced causing
reduction in supply.
 Example: During Christmas season, more tiangge stores sell t-shirts and
RTW’s resulting to an increase in the available shirts and RTW’s in the
market. Moreover, if more farmers will plant rice instead of other crops,
then the supply of rice in the market will increase due to more production
assuming that no destructive calamities will strike the country.
5. Weather Conditions
 Explanation:
 Bad weather, such as typhoons, drought or other natural disasters, reduces
supply of agricultural commodities while good weather has an opposite impact.
 For instance, if typhoon destroys the vegetable farms in Benguet Province, the
supply of vegetables particularly in markets Metro Manila will decline.

6. Government Policy, Taxes and Subsidies

 Explanation:
 Removing quotas and tariffs on imported products also affect supply. Lower
trade restrictions and lower quotas or tariffs boost imports, thereby adding
more supply of goods in the market.
 In order for imported products to be accepted in a country, there is a need for
importers to pay the government the required tariffs or duties and taxes.
Importers must also abide by the quota required by the government on certain
products. Quotas are limitations on the number or quantities of imported goods
which could enter a country. This is used in order to protect domestic or local
products.
 Taxes are considered as costs by businesses, thus an increase in taxes increases
cost of production and reduces supply.
 A decrease in taxes increases cost of production which increases supply.
 On the other hand, subsidies are grants of the government to business. An
increase in government subsidy decreases cost of production, thus increasing
supply.
 The removal of a government subsidy from an industry decreases supply.
7. Prices of Other Goods or Services.
 Explanation:
 The prices of alternative goods or services which a firm can produce or
provide given its production process, may affect supply.
 An increase in the price of an alternative good or service becomes more
attractive to the firm because this would mean higher profits.
 Thus, firms are more willing to produce the product or service resulting to
more supply.
 If a producing firm, for instance, finds that the price of its current output
(bicycles, for example) has gone down considerably, it may change its
products to a new one (motorbikes, for example). If this happens, the supply
of motorbikes will increase. Consequently, the supply of bicycle will
decrease.
8. Future expectations.
 Explanation:
 Changes in the expectations of sellers about the future price of the product
will affect the willingness of sellers to supply the product.
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 If MVB Meat Company expects a drastic increase in prices of meat within the
following week , it may opt to hold its supply of meat for the mean time and
sell it only upon application of the price increase, thus, reducing the present
supply of meat in the market.
 Conversely, if NKR Company, a producer of pager, expects that its product
will be rendered obsolete after 2 years due to introduction of cellular
phones in the market, it may decide to sell its stock of pagers in order
presently earn profit from their sale, rather than have them unsold in the
following years, considering its apparent obsoleteness in the near future.

C. Changes in the Supply Schedule and Movements Along the Supply Curve
 A change in one or more non-price determinants of supply changes the supply schedule
and therefore changes the location of the supply curve in the graph.
 An increase in supply will shift the supply curve from its original location to the right while
decrease in supply will shift the supply curve to the left.
 Thus, the non-price determinants of supply are sometimes called supply shifters.
 Examples:
Change in the Supply Schedule
(i.e. due to technology applied)

Legend: S1 = original supply | S2 = new supply after application of technology

Movement Along the Supply Curve

(i.e. due to technology applied)

Legend: S1 = original supply | S2 = new supply after application of technology