Assignment on Concept of supply

7/28/2019 Assignment on Concept of supply

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An Assignment

On

The Law of Diminishing Returns

Submitted to:

Mr. Ahmed Reza Choudhury

Lecturer

Managerial Economics

Department of Business Administration

University of Information Technology & Sciences

Submitted By:

Md Waliur Rosul

Student ID # MBA 12515035

Major in Human Resource Management

Date of Submission: 15th July, 2013University of Information Technology & Sciences

Date of Submission: 15th July, 2013


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Supply

Meaning of supply

Supply is the quantity of a good or service sold or willingness to sell for consumption by the

producer for a price at a given point of time.

Market supply

Consider the supply schedule below:

PriceQuantity supplied by Market Supply

$ A B C A+B+C10 40 60 80 180

8 30 45 60 1356 22 33 44 99

4 15 23 30 682 10 15 20 45We can see in the above table, the supply schedule of three producers A, B and C for various

price levels. As seen in the table above the supply of goods decreases as the price of the goods

fall.Now consider that the market consists of only these three suppliers, so the market supply will bethe sum of the goods supplied at various price levels all other things remaining same. The same

is depicted using the charts below.

The first three charts shows the individual supply curve of A, B and C as per the supply scheduleabove, while the chart below that depicts the market supply curve i.e. the aggregate supply of A,

B and C


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Law of supply

The law of supply sass that the quantity of a good offered or willing to offer by the

producer/owners for sale increase with the increase in the market price of the good and falls ifthe market price decreases, all other things remaining unchanged

An increase in price will increase the incentive to supply which means that supply curves will

slope upwards from left to right. Supply curves can be curves or straight linesConsider the supply of labour as in the figure below:

nbsp;The above supply curve shows the hours per week at job by the labour on the X axis and hourly

wages on the Y axis. As we can see that as the hourly wages increases the hours spent on jobalso increases. Thus the supply curve is a left to right upward sloping curve


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Determinants of supply

Quantity supplied of a good/ service is affected by various factors. Several key factors affectingsupply are discussed as below:

Price of the product:Since the producer always aims for maximising his returns/profit,so the quantity supplied changes with increase or decrease I the price of the good.

Technological changes: Advanced technology can yield more quantity and at lessercosts. This may result in the producer to be willing to supply more quantity of the goods

Resource supplies and production costs: Changes in production costs like wage costs,raw material cost and energy costs might impact the producers production and

eventually the supply. An increase in such cost might result in lesser quantities produced

and thus lesser quantities supplied and vice versa

Tax or subsidy: Since the producer aims to minimise costs and expand profit, anincrease in tax will increase the total cost, thereby decreasing the supply. Similarly a

subsidy might incentivise the producer to supply more of that goods in order to maximise

his profits. Tax and subsidy are two important tools used by central government tocontrol supplies of certain goods. For example an increase in tax can be used to reduce

the supply of cigarettes, while and increase in subsidy can be used to increase the supplyof fertilizers

Expectations of prices in future: An expectation that the prices of goods will fall infuture might lead to lessen the production by the producer an dthereby decrease the

supply and vice-versa.

Price of other goods: A producer might have several options to produce. Since themoney to invest is limited with the producer he would decide to produce the good which

offers him the maximum profit. Thus if the producer is currently producing good A andthe price of good B increases than he might switch to producing good B as this would

result in better returns for him.

Number of producers in the market: This is a very important factor or determinant ofsupply. If there are large number of producers or sellers in the market willing to sellgoods than the supply of good will increase and vice versa

Supply function

Supply function expresses the relationship between supply and the factors (the determinants of

supply, as discussed above) affecting the producer/supplier to offer goods for sale.For instance take the supply function as below

Qs = f( P, Prg, S )

where;P = price;

Prg = price of related goods; and

S = number of producers.

The supply curve is the graphical representation of the supply function and it shows the quantityof a good that the seller is offering or willing to offer at various prices


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Movement along and shifts in supply curve

Changes in the determinants of the supply cause movement along the supply curve or shifts in

the supply curve.We will discuss these two phenomenons in detail as below:

Movement along the supply curve

Movement along the supply curve happens due to change in the price of the good and resultingchange in the quantity demanded at that price.

For instance, an increase in the price of the good from P1 to P2 in the figure below results in an

increase of quantity supplied of the good from Q1 to Q2. This movement from point A to point B

on the supply curve S due to change in price of the good all other factors of supply remainingunchanged is called movement along the supply curve.

Shifts in the supply curve

Shift in the supply curve is also sometimes referred as a change in supply. This happens due to

changes in factors of supply other than that of price of the goodFor example, if the price of a factor of a related good increases the supply curve shifts. Similarly

changes in technology and government tools like tax and subsidy tends to shift supply curve.


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The supply curve can shift to the right or left as shown in the figure below. A shift towards the

right i.e. from S1 to S2 curve denotes an increase in supply of the good at all levels of prices.Similarly a shift in the supply curve from S1 to S3 denotes a decrease in supply of the good at all

levels of pricesAs seen in the figure above a rightward shift in the supply curve from S1 to S2 increases supply

from Q1 to Q2 while the price of the good remains same at P1. Similarly a leftward shift from S1

to S3 decreases supply from Q1 to Q3 whilst the price remaining unchanged at P1A shift in supply will occur if either of the following changes:

the (opportunity) cost of resources needed to produce the good the technology available to produce the good.

Either factor could cause the supply curve to shift to the left (a decrease in supply) or to the right(an increase in supply).

Backward bending supply curve

Backward-bending supply curve is an example of supply curve where higher price of the gooddoes not result to a higher quantity suppliedDue to higher prices the producer/ suppliers of goods may choose to produce less due to the

income effect of higher prices. For example farmers could choose to decrease man hours of work

when prices rise.The backward bending supply curve is generally explained with wage rate on Y axis and the

quantity of labour supplied on the X axis. As per the law of supply as the wage rate increases, thehigher quantity of labour will be supplied. But after a certain point, the labourers might start towork less for increase in wage rate because the higher wage makes the workers wealthier and

leaves them with more income even with less work. Thus they tend to choose between leisure

and work

The reason for this can be explained with the help of income effect and substitution effect. Asper the Substitution effect a higher wage makes work more desirable than leisure, thereby

increasing supply. Thus the substitution effect is positive for supply


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Alternatively as per the income effect a higher wage results in higher income by working less

hours, thereby decreasing the work hours. Thus the income effect is negative. When the negative

income effect becomes higher than the positive substitution effect, the backward bending supplycurve of labour gets formed

The concept of backward bending supply curve is depicted in the figure below

As the wage rate increases from w1 to w2, the quantity of labour increases from Q1 to Q2, but

when the wage rate rises further to w3, the quantity of labour falls to Q3.

Concept of Supply

By the term supply, we simply mean the amount or quantity of good that the supplier is ready toprovide for the purpose of sale at given time and definite price.

Fig. Supply Curve


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Determinants of Supply

Law of Supply

The Law of supply states that a variation in the price of a good results in change in the supply of

that particular good. There prevails a direct association between supply and price which implieswhen there is an increase in the price of a good, the quantity supplied of it also increments.

While decrease in the price of a commodity results to decrease in the quantity supplied of it.

The table below highlights how the law of supply operates:


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Movement in Supply curve

Extension in supply

When more units of a commodity are supplied at a higher price i.e. higher the price the higher

would be the quantity supplied of a commodity.

Contraction in supply

When less units of a commodity are supplied at a lower price i.e. lower the price the lower wouldbe the quantity supplied of a commodity.

In the graph a shift in supply from points a to c represents contraction in supply.

Shift in Supply Curve

Increase in supply

When more units of a commodity are supplied at the same price or the same units are supplied at

a lower price is defined as an increase in supply. With an increase in supply, the supply curve

gets shifted to the right.

Decrease in supply

It means the same units of a commodity are supplied at a higher price or at the same price lesser

units of the commodity are supplied.

In the graph below, a shift in the curve from S1 to S2 represents a decrease in supply.


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Conclusion

This report has examined a number of ways parents and youth around Minnesota utilize and

think about community learning opportunities in the non-school hours. As is often the case, there

are areas where Minnesota does better than the national average. For example, Minnesota parents

report slightly higher quality in the programs in which their youth most often participate than

parents nationally and that it is somewhat less difficult to find various types of programs in their

communityincluding those that are affordable, conveniently located, and run by trusted adults.

Regarding finding programs during specific times, Minnesota parents, like those in the nation

generally, believe summer programs the most difficult to locate.

But this report is much more than a comparison to national findings. More importantly, it

provides a look inside the geographic and social communities within our state and reveals major

differences that must be addressed. Families with lower incomes and families in the urban metro

area are especially likely to experience a gap in opportunitiesopportunities that are not

affordable, high quality, and avail-able in their communities. Families of color, Hispanic

families, and new immigrants also face difficulties in supporting the learning and development of

their young people through community learning opportuni-ties during the non-school hours.

Assignment on Concept of supply

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