Unit II Supply
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Transcript of Unit II Supply
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Supply Analysis
ByMrs. N. Jayaprada
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Supply
• The quantities of a good or services that the seller is willing and able to provide at a price, at a given point of time.
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Supply Function
Relation between supply and its determinants. S = f {Px, C, T, G, W, E, N}
• Product price• Cost of production• State of technology• Government policy of taxes and subsidies• Weather • Expectations of future prospects for prices, costs,
sales and state of economy in general• Number of firms
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Law of supply
• “Other things remaining the same, the higher the price of a commodity, the greater the supply vice versa”.
Supply schedulePrice Supply per month
15 10000
20 15000
25 30000
30 45000
35 60000
s
s
Supply Curve
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Limitations to Law of Supply
• Future prices• Agricultural output• Subsistence Farmers• State of technology
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Types of supply
• Joint supply• Two or more
commodities are supplied together.
• Composite supply• Single commodity is
supplied by several sources.
Sheep
Mutton Hides Wool
Electricity
Energy
Gas Oil
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Supply and Demand
The Basics
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• Demand Schedule
• Price QTY• $3.50 320• $3.70 300• $3.90 280• $4.10 260• $4.30 240• $4.50 200• $4.70 160• $4.90 120• $5.10 80• $5.30 40
Supply schedule. Price QTY
$3.50 40
$3.70 100
$3.90 160
$4.10 200
$4.30 240
$4.50 260
$4.70 280
$4.90 300
$5.10 320
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What are three tasks that the price system performs for our economy?
1. Rationing of goods and services2. Determination of wages.3. Allocation of limited resources.
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Laws of Supply and Demand
• What is Demand?• The willingness to buy a
good or service at all prices
• What is the law of Demand?
• If nothing else changes, the quantity demand of a good or service is greater at lower prices than higher.
• What is Supply?• Supply is the quantity of a
good or service a firm is willing to produce at all prices.
• What is the law of Supply?• If nothing else changes,
firms are willing to supply a greater quantity of good or service at higher prices than lower.
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Demand Curve for Xbox 360
Pric
e pe
r XB
ox
H
G
F
E
C
D
D
B
A
Quantity Demanded in Billions of Xboxes per Year
75 70 65 60 55 50 45 0
200
250
300
350
400
$450
$500
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
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Pr
ice
per X
box
Quantity Demanded in Billions of Xboxes per year
F 250
$350
D0
D0
C
D1
D1
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
Movement along the curve versus shifts in the Demand curve
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Determinants of Demand
• Price of other goods ( substitute or complementary)
• Outlook (consumer expectation of future income and prices)
• Income (normal goods versus inferior goods)• Number of potential customers (pop.of market)• Taste (fads or fashions)
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Supply Curve for Xbox 360
S
S
a
b
c
e
f
g
h
90 80 70 60 50 40
$500
450
400
350
300
250
Pric
e pe
r Xbo
x
Quantity Supplied in Billions of Xboxes per Year
30 0
200
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
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Movements along versus Shifts of a Supply Curve
S0
S0
Pric
e pe
r XB
ox
Quantity Supplied in Billions of XBox per Year
c
f
S1
S1
310
$400
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
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Determinants of Supply
• Productivity (Improvements in machines and production processes of a good or service)
• Inputs ( Change in the price of inputs required to produce the good or service.)
• Government Actions (Subsidies, Taxes and Regulations)
• Technology (Improvements in machines and production processes of a good or service)
• Outputs ( Price changes in other products produced by the firm)
• Expectations (outlook of future prices and profits)• Size of Industry (Number of firms in the industry)
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Equilibrium
• Equilibrium: The condition that exists when quantity supplied and quantity demanded are equal. At equilibrium, there is no tendency for price to change.
• Shortage or excess demand: The condition that exists when quantity demanded exceeds quantity supplied at the current price.
• Surplus or excess supply: The condition that exists when quantity supplied exceeds quantity demanded at the current price.
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Supply-Demand Market Equilibrium
D
D
G
A S
S
90 80 70 60 50 40
$500
450
400
350
300
250
Pric
e pe
r xb
ox 3
60
Quantity in Billions of Xbox 360 per Year
30 0
200
E
g
a
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
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Excess Demand
• Excess demand, or shortage, is the condition that exists when quantity demanded exceeds quantity supplied at the current price.
• When quantity demanded exceeds quantity supplied, price tends to rise until equilibrium is restored.
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Excess Supply
• Excess supply, or surplus, is the condition that exists when quantity supplied exceeds quantity demanded at the current price.
• When quantity supplied exceeds quantity demanded, price tends to fall until equilibrium is restored.
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Changes in Equilibrium (IRDL)
• Increase in demand leads to higher equilibrium price and higher equilibrium quantity.
• Increase in supply leads to lower equilibrium price and higher equilibrium quantity.
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Changes in Equilibrium (IRDL)
• Decrease in demand demand leads to lower price and lower quantity exchanged.
• Decrease in supply leads to higher price and lower quantity exchanged.