Chapter 2 WEEK 2 PART 2

CHAPTER 2
DEMAND AND SUPPLY
1
LEARNING OUTCOMES:-
• At the end of this chapter, students should
be able to:-
1. Define the theory of supply.

2. Differentiate between change in supply
and changes in quantity supplied.
2
DEFINITION
∆’s IN Qs
VS
∆’s IN SS
LAW OF SS
DETERMINANTS
3
Definition of supply
• Supply is a schedule or curve showing the various

amounts of a product that producers are willing and
able to make available for sale at each of a series of
possible prices during a specific period, other things
equal
4
• The law of supply:-
As price increases, the Qs increases (P↑,Qs↑) and vice versa, as the price
decreases, the Qs decreases (P↓,Qs↓).
- Positive or direct relationship between price and quantity supplied.
LAW OF SUPPLY
The
relationship
supplied goes up
When the price
..the quantity
goes down..
between price
supplied also goes
When the price
..the Quantity
and quantity is
goes up..
positive.
up
5
Supply Curve
• Supply curve shows the total quantity that being supplied at various
price level, ceteris peribus (other things held constant). The upward
slope of the curve reflects the law of supply—producers offer more of a
good, service, or resource for sale as its price rises.
Price
Quantity 5
Price per Supplied per
Bushel Week
4
A $5 60
Supply Curve
B 4 50 3
C 3 35
2
D 2 20
E 1 5 1
6
5 20 35 50 60 Quantity
Determinants of SS / Changes in SS
1. Resource prices (Cost of production)

• If price of resource goods increase, Cost of producing will increase,
squeeze the profit, therefore reduces firms’ incentive to SS , thus Qs of of
that goods decrease (SS ↓)
• For example, a decrease in the price of iron ore will decrease the price of
steel.
2. Technology
• Improvements in technology (techniques of production) enable firms
to produce units of output with fewer resources and reduce cost of
production, Qs increase (SS ↑)
3. Taxes and subsidies

• Tax ↑, will increase production costs supply ↓ (inverse)
• Subsidies ↑, will reduce production costs supply ↑ (direct)
7
Determinants of supply
4. Price of other goods
• Firms that produce a particular product, say soccer balls, can sometimes
use their plant and equipment to produce alternative goods, say
basketballs or volleyballs.
• If the prices of those other goods increase, soccer ball producers may
switch production to those other goods in order to increase profits.
This substitution in production would decrease the supply of soccer
balls.
5. Expectation of future prices

• If producer expect the price of goods (rice) increase in future, the supply
for rice now decrease because they will produce more rice in future.
• Pe ↑ Currents SS ↓
• Pe ↓ Currents SS ↑
5. No of seller
• Increase no. of producer, increase supply (SS ↑)
• Decrease no. of producers, decrease supply (SS
8
Determinants of Supply: Factors That Shift the Supply Curve
Determinant Examples
Change in resource A decrease in the price of microchips increases the supply of computers; an
prices increase in the price of crude oil reduces the supply of gasoline.
Change in The development of more effective wireless technology increases the supply
technology of smartphones.
Changes in taxes An increase in the excise tax on cigarettes reduces the supply of cigarettes; a
and subsidies decline in subsidies to state universities reduces the supply of higher
education.
Change in prices of An increase in the price of cucumbers decreases the supply of watermelons.
other goods
Change in producer An expectation of a substantial rise in future lumber prices decreases the
expectations supply of logs today.
Change in number An increase in the number of tattoo parlors increases the supply of tattoos;
of suppliers the formation of women’s professional basketball leagues increases the
supply of women’s professional basketball games.
Changes in Qs vs changes in supply
Changes in Qs Changes in Supply
P P
S
P3
P1
P
P2
Q
Q2 Q1 Q3 Q Q3 Q1 Q2
• Refers to a shift in the supply

• Refers to a movement along a supply curve.
curve. • Price will remains constant
• The only factor that can directly cause • Factor influence is non-price
a change in the quantity supplied of a
good is a change in the price of the
determinants
good-that is, its own price. Example: If cost of production
• Factor influence is price increase, the supply will reduce, the
Example: P↑, Qs ↑ supply curve will shift leftward.
10
11
QUICK ASSESSMENT
Table below shows the relationship between quantity demanded and
supplied at different price level. Draw a demand curve and supply curve
using graph paper.
Price(RM) (Qd) (Qs)

10 400 1000
9 600 800
8 800 600
7 1000 400
6 1200 200

Chapter 2 WEEK 2 PART 2

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CHAPTER 2

DEMAND AND SUPPLY

1. Define the theory of supply.

• Supply is a schedule or curve showing the various

- Positive or direct relationship between price and quantity supplied.

1. Resource prices (Cost of production)

3. Taxes and subsidies

5. Expectation of future prices

Changes in Qs Changes in Supply

• Refers to a shift in the supply

Price(RM) (Qd) (Qs)

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