Theory of Supply (Part 1)

Starter Question 1

• Why does the price of crude oil always

rise whenever there is a crisis in the
Middle East or in any other oil-producing
country?

Open Ended

Why does the price of crude oil always rise whenever there is a crisis in the
Middle East or in any other oil-producing
country?

Starter Question 2

• Why does the price of agricultural

commodities rise whenever there is a
drought?

Open Ended

Why does the price of agricultural commodities rise whenever there is a
drought?

Theory of
Supply (Part1)

Lesson Objectives

By the end of the lesson, you will be able to:

• define Supply and Quantity Supplied;

• state the typical relationship between Supply and the price of a good and illustrate it with

Schedules, Curves and Functions;

• Explain Individual Supply and Market Supply.

Word Cloud

Mention another word related to supply of goods

Definition of Supply

• This is the quantity of a good sellers

are willing and able to offer for sale at
various prices over a period of time.

• In Economics, Supply is seen as a

Relationship between the amount of a
good sellers want to sell and the price
of the good.

Definition of Quantity Supply
(QS)

• This is the specific amount of a product that sellers

are willing and able to sell at a particular price.

Nature of relationship
between Price and
Supply

• The typical relationship between the supply of

a good and its price is a Positive Relationship,
that is, as the price of a good rises, the quantity
of the good supplied rises and vice versa. This
typical relationship between supply and price
is known as the Law of Supply

• Law of Supply states that if other factors

affecting supply remain unchanged, an
increase in price will cause an increase in
quantity supplied while a decrease in price will
cause a decrease in quantity supplied

Open Ended

What is the difference between the Law of Demand and the Law of Supply?

Supply Schedule

• This is a table that shows quantities

supplied by producers at various prices

Price of

Ice-cream cone

Quantity of

Cones supplied

$0.00
0.50
1.00
1.50
2.00
2.50
3.00

0 cones

0
1
2
3
4
5

Supply Curve

• This is a graph that shows quantities

supplied by producers at various prices.
A typical supply curve slopes upwards
from left to right.

Multiple Choice

 The diagram shows the supply curve for coffee. The price of coffee increases from P1 to P2. How would this benefit firms in the coffee industry?

• A higher price gives firms the ability to increase profits.

• A higher price gives firms the incentive to reduce total fixed costs.

• A higher price will encourage consumers to buy more coffee increasing total revenue.

• A higher price will encourage less firms to enter the market to supply coffee.

Supply Functions

• This is an is an algebraic expression that shows the relationship

between quantity supplied and price. The coefficient of Price in
a typical supply equation is positive. For instance, Qs = -5 + 6P; is
a supply function because the coefficient of Price (i.e., P) in the
function is plus.

Multiple Choice

Given that the market supply for a good is represented by the following supply function: Qs = -5 + 6P. What will be the quantity supplied when the price is $5?

• 20 units

• 25 units

• 30 units

• 40 units

Individual Supply

• Individual supply is the total amount of a good or service a single

producer is willing to sell.

Price of ice-cream cone

Ben

$0.00
0.50
1.00
1.50
2.00
2.50
3.00

0
0
1
2
3
4
5

Price of ice-cream cone

Jerry

$0.00
0.50
1.00
1.50
2.00
2.50
3.00

0
0
0
2
4
6
8

Market Supply

• Market supply is the total supply of a product from all of its sellers.

It is sum of all individual supplies of a product.

Price of ice-cream

cone

Ben

Jerry

Market

$0.00
0.50
1.00
1.50
2.00
2.50
3.00

0
0
1
2
3
4
5

+

0
0
0
2
4
6
8

=

0
0
1
4
7
10
13

Multiple Choice

What is the difference between Individual Supply and Market Supply?

• 1. . Individual supply is the total amount of a good produced in one day, while market supply is the total amount produced in a year.

• Individual supply is the total amount of a good produced by one company, while market supply is the total amount produced by all companies in the market.

• Individual supply is the total amount of a good one producer is willing to sell, while market supply is the total amount all producers are willing to sell.

• Individual supply is the total amount of a good available in one specific location, while market supply is the total amount available in all locations.

Lesson Summary

• Supply is the quantity of a good sellers are willing and able to offer

for sale at various prices over a period of time. Supply is not the
same as total production. A producer may decide to supply less
than the total amount produced

• There is a positive relationship between the supply of a good and

its price. This positive relationship is called the Law of Supply

• Supply can be illustrated with tables, graphs or equations.
• Supply data can either be for an individual or an entire market.

Market Supply is what is relevant for price determination.