THEORY OF SUPPLY

Supply is defined as the quantity of a commodity which a seller offers for sale at a given
price in a period of time and in a particular place or platform.

Lipsey (1976), says the supply of a commodity refers to the amount of that commodity that
the producers are able and willing to offer for sales.

Production output means total quantity of goods produced in a given period. Stock supply
does not mean quantity of stock in a warehouse, however it means the quantity put forward
or offered for sale at a given period.

Supply Schedule

This is a table that shows the various quantities of goods which a seller offers for sale at a
given price within a period of time.

Two Types of Supply Schedule

The two types of supply schedule:

(1) Individual type of supply schedule

(2) Market supply schedule

Individual Supply Schedule

The table lists various quantities of a product which an individual seller offers to sell at
various prices in a given or particular period.
Market Supply Schedule
Price Qty SS Peter Qty SS James Qty SS Philip Qty SS Frank Total Supplied
20 10 40 60 70 170
30 20 50 70 80 220
40 30 60 80 90 260
50 40 70 90 100 300
60 50 80 100 110 340

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Market supply schedule revealing quantities supplied by individual sellers.

Market Supply Schedule

This refers to a table which lists the total quantities of a commodity which all sellers in a market
offer for sale with alternative prices in a given period.

Market supply schedule is also referred to as:

(a) Aggregate supply schedule

(b) Composite supply schedule

Supply Curve

This is a curve that combines different quantities of a commodity supplied at their various prices.
In other words it shows relationship between price and quantity supplied.

It is a curve that shows the quantity supplied of a commodity at each price.

It is a graphical representation of supply schedule showing the relationship between quantity

supplied at each possible price.
Price S
P2

P1

Q1 Q2 Quantity

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Slope of Supply Curve

The slope of a supply curve shows that as price rises the quantity which a producer or a
seller offers for sale also increases. The slope therefore confirms the economic behaviour
of producers or sellers or the economic statement that more are produced or offered for sale
at a higher price than at a lower price.

Law of Supply.

The higher the price the higher the quantity that would be supplied. The lower the price the
lower the quantity that would be supplied.

Types of Supply Curve

The following are the major types of supply curves.

(a) Individual supply curve

(b) Market supply curve

Individual Supply Curve

This is a curve that relates the quantity of a commodity supplied by one seller to the prices.
It shows the quantity supplied by one seller at each price.

Market Supply Curve

It is a curve that relates the total quantity of a product supplied by all sellers in a market to
each price. it is a graphical representation of market supply schedule.

Exceptional Supply Curve

The law of supply states that the higher the prices the higher the quantity that would be
supplied. However, there are some obvious limitations to the law of supply. This type of
curve is in form of exceptional or abnormal supply. It is a supply that contravenes the law
of supply.

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What is Abnormal Supply?

Abnormal supply is a special situation in a market where more goods are supplied at lower
price than at a higher price at a particular time.

Situations of Abnormal Curve

1) A vertical Supply Curve

It is a curve that is perpendicular to the base. This actually means that the quantity supplied
remains constant irrespective of changes in prices.
P S

P2

P1

Q1 Quantity
Examples are;

(a) Agricultural products e.g perishable goods such as vegetables, tomatoes, fruits and
no storage facilities.

(b) Land-Earth Surface: Land remains fixed and cannot be significantly increased or
decreased due to changes in prices. It is also vertical to the base as shown above.
2) Backward Slopping Supply Curve e.g supply of labour.

Labour supply at times contravenes the law of supply and demand. It is also known
fact that some people due to certain reasons known to them work more hours at a
lower wage than at a higher wage.

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 150 C

100
B

50
B
0 10

As the wage rate rises above ₦100 per hour, the workers supplied lesser amount of work.
The lower the wage rate the higher the quantity offered,

3) Horizontal Supply Curve (Securities, fixed prices (control prices): Under the perfect
competition, the prices of goods or services are fixed and cannot be changed by the
forces of demand and supply. Most importantly, the prices of securities, shares and
stocks tend to remain the same irrespective of changes in quantity supplied.
P

P1 S

4) Finally a horizontal supply curve happens when government fixes prices for certain
selected goods with the instrumentality of price control policy. Please note their
fixed prices remain the same irrespective of changes in supply.

Types of Supply

The following are types of supply.

(1) Joint supply – Goods produced together

(2) Competitive supply – supply of goods with several uses

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 (3) Composite supply – supply of all goods with similar uses

Joint Supply

These are goods produced together at the same time. It occurs when two goods are
produced together at the same time. Any attempt to produce beef leads to the production
of hides and skin.

Note: If there was an increase in price of beef, there will be an increase in the supply of
cattle but this causes a fall in the price of hides and skin if it is not in high demand.

Note: In joint supply, an increase in supply of the product leads to a rise in the supply of
another and a reduction in its price.
Price
D S2
Price
D S1

S1
P2
S2
P1

P1
P2 D
D

Q2 Q1 Quantity
Q1 Q2 Quantity
An increase in the supply of beef makes its
An increase in the supply of beef reduces
price to fall from P1 to P2. If the demand
the supply of hides and skin and the price
does not increase.
will rise.

Competitive Supply

This is a supply of a commodity with several uses. This is the supply of a commodity or
factor of production that serves numerous purposes and uses. Example is a plot of land.
One can use a plot of land to farm and build a house. This means an increase in the supply

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of one product will cause a fall in the supply of another and thereby leading to increase in
price.

Composite Supply

This is the supply of goods with similar uses. This is the total supply of goods and
commodities that serve almost the same uses. Composite supply of some motor parts which
can fit in several cars e.g plugs, batteries, fuel, filter, oil which can be used in machines
and cars. Batteries can be used in cars and machines.

Factors affecting Supply

The following factors affect the supply of commodity to either increase or decrease.

(1) Government policy: Government policy can affect the supply or production of a
commodity. The introduction of subsidy can also boost supplies of commodities.
(2) Expectation of future rise in price: When consumers expect a rise in the price of a
commodity, they increase the demand for the commodity, the suppliers will increase
the supply.
(3) Change in price of the commodity: When there is a sudden rise in price of a
commodity, suppliers will increase their supplies in order to take advantage of
sudden rise in price.
(4) Change in the number of producers: An increase in the number of producers of a
commodity will increase the supply in the market. Again, a reduction in the
suppliers of goods will reduce total supply.
(5) Change in cost of production: If the cost of production reduces, the supply of the
goods will increase as of cost of production will encourage more profitability and
more supply to the market.
(6) Improved technology: Improved technology will make the cost of production
cheaper thereby increasing the quantity supplied to the market.
(7) Weather: During raining seasons, producers of umbrella supply more of umbrellas
to the market.

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 (8) Level of income: The higher the standard of living and income, the higher the
demand of goods and services which will instigate suppliers to supply more goods
and services to the market.
(9) Prices of related goods: If the prices of related goods are cheaper, consumers will
shift to the related goods thereby prompting the suppliers to increase the quantity of
goods supplied.
(10) Access to capital: The more capital available to the supplier, the more goods will be
supplied
(11) Prices of factors of production
(12) Goal of the firm

CHANGE IN SUPPLY AND CHANGE IN QUANTITY SUPPLIED

Change in Quantity Supplied

This change occurs as a result of a change in the price of the goods and this involves a
movement along the supply curve either upwards or downwards. A fall in price prompts
suppliers to stepdown in the quantity supplied.

Price
D S

P2

P1

P2

S D

Change in Supply Q3 Q1 Q2

A change in supply is a change that occurs as a result of a change in certain factors such as
change in technology, access to more capital, change in level of income etc. it causes a
shift of the supply curve either inward or outward as graphically shown

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 S2

P2 S1

P1 S3

P3

Q2 Q1 Q3
As the number of producers increases, the output also increases and leads to increase in
supply even though its price remains constant. S2 depicts a reduction in the number of
producers while S3 depicts an increase in the number of farmers.

What causes in ward shift

(1) Poor climate

(2) A fall in the prices of substitutes
(3) A fall in the number of producers
(4) A fall in the prices of the commodity
(5) Increase in the cost of production
(6) Poor technology

Reasons for outward shift

(1) A fall in cost of production

(2) A rise in price of substitutes
(3) An increase in price of commodity
(4) Good government policy
(5) Improved technology
(6) Good weather condition
(7) Goal of the firm

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SUPPLY FUNCTION

The quantity supplied of a commodity is a function of the price of the commodity. Other
factors include: Price of other commodities, prices of factors of production, improved
technology, goal of firm, good weather, government policy etc. The above statement stated
in symbols is called supply function. Algebraically stated

QS = S(Pc, Po, Pf, T, Gf, Gp, W)

Where; Pc = Price of commodity

Po = Price of other commodities

Pf = Price of factors of production

T = Improved technology

Gf = Goal of the firm

Gp = Government policy

W = Weather condition

ELASTICITY OF SUPPLY

Supply has direct relationship with price since a rise in price brings about a rise in quantity
supplied and vice versa.

Elasticity of Supply can be aptly defined as: The degree of responsiveness of supply of a
commodity to a change in its price. It means the Extent to which supply of a product
responds to a change in the price of that commodity.

TYPES OF ELASTICITY OF SUPPLY.

There are five types of elasticity of supply. Let's discuss them:

1. ELASTIC SUPPLY

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 This is defined as a certain change in in supply leads to more than proportionate
change in quantity supplied.

Again a small change in price of about 10 percent leads to a great percentage change
of 80 percent in quantity supplied.
Price

p2

p1

q1 q2 Q

2. INELASTIC SUPPLY

This takes place when a change in price caused a less than proportionate change on
quantity supplied. A big change of 60 percent in price causes a small change in
quantity offered for sale of about 15 percent.

Price

p2

p1

q1 q2 Q
3. UNIT ELASTICITY OF SUPPLY

This is defined a situation where a certain change on price causes a proportionate

change in quantity supplied.

If the percent change price is 15 percent and change in quantity supplied rose by 15
percent we can say the elasticity is unitary.

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 A 75 percent change in price leads to 75 percent change in quantity supplied.
Price

p2

p1

q1 q2 Q

4. PERFECTLY ELASTIC SUPPLY.

A supply is perfectly or completely elastic if the price is fixed no matter the amount
of quantity supply. The supply curve is parallel to the horizontal axis.

Price

P S

5. PERFECTLY INELASTIC SUPPLY

When the same quantity is supplied irrespective of the price we have a situation of
perfectly inelastic curve. Its parallel to the to the horizontal line
Price S

0
Quantity

MEASUREMENTS OF ELASTICITY OF SUPPLY

Measurements of elasticity of supply is given below:

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A percentage change in quantity supplied divided by percentage change in price

FORMULA FOR CALCULATING COEFFICIENT OR NUMERICAL VALUE OF

PRICE ELASTICITY OF SUPPLY

The coefficient of price elasticity of supply Es is calculated as follows.

Es=

Where

% Qs = Difference between the two quantities divided by original quality

%P = Difference between the two prices divided by ordinary price

Es= Elasticity of supply

%= Percentage

Qs= Quantity supplied

= Change in

P = Price

Example :

The price of a book is N10 and the quality offered for sale is 40 books . Due to a rise in
price from N10 to N12 supply increases to 70 books. Calculate the price elasticity if supply
and determine the nature of elasticity of supply

Solution:

Es=

Another formula is :

%Qs = × = 75%

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%P = × = 20%

Es= = = 3.75

Nature of Elasticity; Elastic Supply. The coefficient is more than 1.

FACTORS AFFECTING ELASTICITY OF SUPPLY

The following factors affect elasticity of supply:

1. Availability of faction of production- The more available the factors of production

are the more elastic the supply will be

2. Time : If the supply can supply a large amount of goods within a short time we say
the supply is elastic.

3. Storage facilities: If the storage facilities are available, the supply will respond to
changes in price.

4. Level of capacity utilization.

5. Possibility of substitute for factors of production

6. Perishability of production. Such goods are inelastic in supply

7. Nature of product. Durable goods can be supplied immediately to take advantage of

rice in price

8. Wide distribution of goods. The producer can withdraw goods from one location
and send to another if price rises in some places

9. Level of technology

10. Ease of conversion of factors of production

11. Ease of entry of new producers

Importance of Elasticity

1. Government knows where to put more tax

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 2. Foreign companies can take advantage of inelastic demand in another country and
supply more to make profit
3. Income elasticity. Producers will capitalize on income elasticity that faces their
products
4. Price elasticity; Producers will know which elasticity faces their products and know
how to take advantage of such situations

ELASTICITY OF DEMAND AND SUPPLY

Price elasticity of demand: This is the degree of responsiveness of quantity demanded for
a product to a change in price.

Definition: Price elasticity of demand measures the responsiveness of quantity demanded

for a good or service to the change in the price of the good. It tells us how the consumer
responds to increases in the prices of fuel, food, transport etc.

It is expressed as the ratio of percentage change in quantity demanded to percentage

change in the commodity’s own price.

Ed =

Where Ed = Price elasticity of demand

Types of Price Elasticity of Demand

1. Elastic Demand: Demand for goods is price elastic if a given change in price causes
a greater percentage in quantity. Demand is elastic if a certain change in price causes
more than a proportional change in quantity demanded.
Price

P1

P2

15 Q1 Q2 Quantity
This means that a small percentage change in price causes a greater percentage change in
quantity demanded.

Example: Price of shirt = ₦10,000

Quantity demanded = 100 units

When price falls to ₦9000, 150 units are bought weekly.

The shirt is elastic because a 10% drop in price lead to a 50% increase in purchase.

₦10,000 E1 E >1
10%
₦9,000 E2

50%
100 150 Q

A change in demand leads to more than proportionate change in price

= Price = 10%

= Demand = 50%

2. Inelastic Demand: If a change in price level leads to less than proportionate change in
quantity demanded, demand is said to be inelastic.
Note: Demand is inelastic if a large percentage change in price causes a small
percentage change in quantity demanded. Example fuel, cigarette, food.
A cube of sugar is ₦10 and 100 cubes are demanded every day. When the price rises
to ₦20 per cube, 95 cubes were demanded.
Here in price is 100%
in quantity demanded is 5%

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Such demand is deemed to as inelastic

D
₦20
P1
100%
P2
₦10 D
5%
D
90 95 Q2 Q1
100 Price

A change in demand is less than proportionate change in price. A big change in price leads
to a small change in quantity demanded.

P = 100%, D = 5% = = = 0.05

3. Unit Elasticity: Elasticity is unitary if a change in price causes a proportionate equal

change in quantity demanded. In other words, demand has a unit elasticity. If a
percentage change in price leads to equal percentage change in quantity demanded we
say its unit elastic.
Example if the price of boxer is ₦1000 when the quantity demanded is 100 units. When
the price falls to ₦900, demand increases to 110 units.
in price = 10% = 10%
in demand = 10% = 10%
Elasticity = = 1

₦110
10%
₦100
10%

90 100 Q

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Perfect Elasticity of Demand
Demand is completely elastic if an infinite quantity of goods are demanded either at
fixed price or at a slightly lower prices and demand is zero if the price is slightly raised.
Here demand is perfectly elastic if any amount is demanded at the prevailing price. the
price is fixed no matter the quantity demanded. Consequently, the demand curve is
parallel to the base line. Perfectly elastic demand is also called infinitely elastic
demand or completely elastic demand.

E = Infinite
D D

Q3 Q2 Q1

Perfectly Inelastic Demand

Under this, demand is completely inelastic if the same quantity is demanded, whatever
the price is. Such goods are water, food, house, firewood, drugs. Even if the price rises
astronomically, people buy the same quantity. In other words they buy the same
quantity irrespective of the price.

Price D
P4

P3

P2

P1

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Price inelasticity of demand is also referred to as zero elasticity of demand. Hence the
demand curve is perpendicular or parallel to the base line at angle 900.
Range of Elasticity

s/no Type Description Price elasticity of

demand coefficient
1 Elastic E<0>1
E>1
2 Inelastic E>0<1
E<1
3 Unit elasticity E=1
4 Perfectly elastic E = infinitely
5 Perfectly inelastic E = 0 (Zero)

Note
% = Percentage
= Change
Qty = Quantity
DD = Demand
E = Elasticity
< = less than
> = more than
= infintely
Classification of Goods according to Elasticity

S/No Type of Elasticity Classification Examples

1 Elastic Luxurious or superior Jewelleries, gold, lacem
cars, (belt…….)
2 Inelastic Normal goods, items of Garri, soap, yam, cigarette,
necessity egg, trouser, bread,
detergent, petrol, slippers

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 3 Unit elasticity Semi-luxurious goods Bread, electronics,
beverage, shoes, furniture,
wrist watch
4 Perfectly elastic Inferior goods Fruits, apple,cherry, paw
paw, cocoyam, fresh
tomato, crayfish, meat
5 Perfectly inelastic Indispensable goods Food, cloth, house, water,
firewood, kerosene,
kitchen

Measurement of Price Elasticity

Points to Note:
(1) if elasticity is zero, demand curve is perfectly inelastic
(2) if elasticity is infinite, demand curve is perfectly elastic
(3) if elasticity is unitary, demand curve slopes downwards
(4) if demand is elastic consumers react more proportionately to a change in price
(5) if demand curve is inelastic consumers react less proportionately to a change in
price
(6) if demand curve is unit elastic, consumers react proportionately to a change in
price.

Synonymous

Perfectly elastic, completely elastic, infinitely elastic and absolutely elastic.

The numerical absolute value of elasticity is referred to as coefficient.

The formula for calculating the coefficient for price elasticity value is;

Percentage change in quantity demanded divided by the percentage change in price.

Example: Ep =

Where Ep = Price elasticity of demand

Q = Quantity

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 P = Price

% P = Percentage change in price

% P=

% Q = Percentage change in quantity demanded

% P=

Another method

Point price elasticity of demand

Ed = =

Where :

= Change in quantity i.e New quantity – Initial quantity

= Change in price i.e New price – Initial price

Q = Initial quantity

P = Initial price

Application to Demand Function

Ed =

Where (differentiate Q with respect to P)

Example

Given the demand function

Q = 100 – 3p, where unit price p = ₦20. Compute the price elasticity of demand and
interpret your result.

Ed =
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Then differentiate 100 – 3p, we have;

= -3

Substitute this into the equation

Ed = - to get

Ed = - (-3)

When P = 20

Ed =

= 3 20 = 60 = price

Substituting it into the Demand equation we have ;

Q = 100 – 3(20) = 40

Ed = - (- 3) = = = = 1.5

It means that the demand is price elastic

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