Scribd
Upload
8 views

UNIT 8

Uploaded by

Mumtaj M
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
8 views

UNIT 8

Uploaded by

Mumtaj M
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 26

UNIT 8: Supply

• Supply- It is willingness and ability to sell a product


or service at a given price, ceteris paribus.
• Supply is influenced by the amount produced, but
is not the same as production. This is because
some of the amount produced today may be
stored, in order to be sold at a later date.
• Conversely, it is possible that some of the output
offered for sale today may have come from the
stocks.
Supply and price
• Direct and positive relationship between
Supply and Price.[ SS curve slopes upward]
• Higher price is an incentive for the producers
to produce more and cover the cost of the
production
• Lower price means lower profitability.
• This leads to a positive relationship between
price and quantity supplied of a good/service.
Individual Supply Market Supply
• It is the supply of one • It is the total supply of a
plant / firm. product supplied by all the
firms in the industry.
• The quantities that would
be supplied by each firm at
each price are added up. So
aggregation of the supply of
each individual firm gives
the market supply.
The effect of a change in price on
supply

• The changes can be


• Movement along Supply Curve
Movement
of Supply
Curve S
As the price
B changes, the
$30
quantity supplied
Price

will also change.


A
$15

1,250 1,500
Quantity
CONDITIONS OF SUPPLY
Shift of
At the same
Supply
price, a
Curve S2 S
S1 different
quantity is
supplied.
Price

A B
$15

1,250 1,500
Quantity
Taxes
Subsidies
Cost of
Production

Why Supply
Changes?

Other
Technology factors
Cost of Production (COP)

COP↑  supply ↓ & COP ↓  supply ↑


COP may change due to change in…….
– Wages (Salary)
– Productivity (output per worker)
– Raw material
– Energy costs (Electricity)
– Transport costs
Income
Taxes- a payment to the government

If government puts taxes  COP ↑ 


Supply ↓
Direct taxes- taxes on the Indirect taxes- tax on
spending of goods

income and wealth of the VAT and excise duty


and services- such as

individuals and firms


Ex: Corporation tax- tax on the profits
of the firm.
Before the imposition of indirect tax i.e. VAT- Original price of a product (say, cigarette)- Rs 10 per packet
After the imposition of indirect tax i.e. VAT- Now, producer have to pay a tax to government- indirect tax are considered as
high cost of production which results in higher price- transfer the burden from producer to consumer in the form of higher
price. See the process:
Original price of a product (say, cigarette)- Rs 10 per packet
VAT- [ Rs 6]- causes the price to increase from Rs 10 to Rs 14.
Final price paid by the consumer- Rs 14.
Indirect tax are not equally shared between the buyer and seller, but one bear most of the burden than compared to other.
Pe= Rs 10
Pc= Rs 14
Pp= Pc- tax= 14-6= Rs 8.
Pp falls from Rs 10 to Rs 8- Rs 2 will be paid as a tax revenue to the government by the producer
Pc rises from Rs 10 to Rs 14- Rs 4 will be paid as a tax revenue to the government by the consumer
Producer burden of tax – shifted to consumer in the form of higher price.
Relatively Inelastic good- DD for a product continues to be there, irrespective of frequent changes in the price of a product
or services. Example: Necessity ( petrol, oil, water )
Pe= $20
Tax= $5- causes the price to rise from $20 to $23.
Pc= $23
Pp= pc- tax= 23-5= $18
Pp falls from $ 20 to $18- $2will be paid as a tax revenue to the government by the producer
Pc rises from $20 to $23= $3 will be paid as a tax revenue to the government by the consumer
Consumer burden of paying the tax- will be Higher than the producer.
Relatively elastic good- DD for a product continues to change, due to frequent changes in the price of a product or services.
Example: Luxury (laptop, mobile phones)
Pe= $20
Tax= $7- causes the price to rise from $20 to $21.
Pc= $21
Pp= pc- tax= 21-7= $14
Pp falls from $ 20 to $14- $6will be paid as a tax revenue to the government by the producer
Pc rises from $20 to $21= $1 will be paid as a tax revenue to the government by the consumer
Producer burden of paying the tax- will be Higher than the consumer.
Population
Subsidies

• If the government gives a subsidy 


COP ↓  Supply ↑
Price of Related Goods
Price of Related Goods

Related Goods

Profitability of Profitability of
goods in joint substitutes in
supply supply
The Profitability of Goods in Joint Supply
• DVD Players and DVD are produced together.
• When the Price of DVD Players ↓  Demand
of DVD Players ↑  So more DVDs are needed
 But the Supply of DVD player will fall due to
fall in price and supply of DVDs will shift to
leftward.
The Profitability of Substitutes in Supply
• If Mango Juice becomes more PROFITABLE
than Apple Juice, producers will produce
more Mango juice .

So
Supply of Mango juice ↑ &
Supply of Apple Juice ↓
Improvement in technology
• Raise the productivity of capital
• Reduce cost of production
• Increase in supply
• Availability of more efficient capital goods and
methods of production.
Other Factors
War - Earthquakes , floods & fire
Weather- affect the agricultural products and
health of livestock and crops-outbreak of
disease
Discoveries and depletions of commodities-
coal, oil and gas
Expectations of future prices changes
– If producers expect prices ↑  Supply ↓ now
& will build up STOCKS
– If producers expect prices ↓  Supply ↑ now
& reduce production
Think?

WHO DECIDES THE


PRICE OF THE
PRODUCT?
• Demand & Supply of a
product determines the PRICE
of a product!!!

• When
• Demand = Supply  Equilibrium
• Demand ≠ Supply 
Disequilibrium
Demand = Supply
(Equilibrium Point)

24
• Surplus
– Supply > Demand

• Shortage
– Demand > Supply

AS Economics Unit 2 Chapter 7 25


Why the Equilibrium Changes?

–Change in Demand
–Change in Supply
–Change in Demand & Supply

You might also like