Determinant of Supply

Determinant of Supply

1.                  Price of related goods

The supply of a product can be influenced by the price of related goods:

a.                  Substitute goods

Supply of a product will decrease if there is an increase in the price of a substitute product, for example Maxis and Celcom.

When the price of Maxis increase, the quantity supplied will increase (law of supply) and the quantity supply of Celcom will be decrease. So, if price of substitute goods increase, supply curve for current goods will shift to the left.

P_maxis ↑, Q_{s maxis}↑ → SS_celcom ↓

b.                  Complementary goods

An increase in the price of a product will increase the supply of a complementary product. For example, Petrol and Car.

When the price of Car increases, the quantity of car supplied will increase and the supply on petrol will also increase since both are complementary goods. So, if the price of complementary goods increases, supply curve will shift to the right.

P_Car ↑, Q_{s Car}↑ → SS_petrol ↑

c.                   Cost of production

When the cost of production increase (price of production factor increase), quantity supplied will be decrease and vice versa. For example, an increase in wages of labor and price of capital equipment in production process will increase the cost of production and thus reduce the supply curve. So, cost of production increase, will shift the supply curve to the left.

d.                  Expected future price

If the seller was expecting the price will increase in following month, the current quantities supplied will be decrease and vice versa. For example, when the government announces an increase in the price of sugar, the current supply will decrease because the supplier wants to gain a higher profit with a higher new price.

Pe ↑ → Qs now ↓ → SS shift to left

e.                  Technological advance

Changes in technology are the most important influences on supply. Existence of the new technology will reduce cost of production. So, the seller can increase their production. For example, when new technology was introduced in paddy harvesting, the supply of rice will be increased. So, the technology advance will shift the supply curve to the right.

f.                    Number of sellers

The large number of firms supplying a product, the large quantity supplied of the product and vice versa. For example, if there is an increase in the number of cafeterias in a KPMBP, the supply of foods and drink will increase. So, if number of seller increase, supply curve will shift to the right and vice versa.

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Supply

   2.2       Supply

Definition of supply

Supply is refers to ability and willingness to sell or produce a specific quantities of goods in a given period of time at a particular price, ceteris paribus. Ceteris paribus is a Latin phrase that means holding other factors constants while some other factors change.

Law of Supply

The law of supply states that there is a positive relationship between price of the product and quantity supplied. When the price of the product increase, the quantity supplied of that product will be increase and when the price of the product decrease, the quantity supplied of that product will be decrease, ceteris paribus.

Supply schedule and Supply curve

The supply schedule for a product is a list of the quantity that a producer is willing to sell at different prices at one particular time. Table 2.4 shows the quantity supply of apples at each price level.

 

Table 2.4: Individual Supply Schedule for apples. 

Combination	Price (RM)	Quantity (units)
A	100	5
B	80	4
C	60	3
D	40	2
E	20	1

The above supply schedule can be shown in a diagram to show how we obtain a supply curve (see Figure 2.6)

 

The supply curve shows the relationship between the quantities supplied of a product and its price. The supply curve must slope upwards (positive slope) because the direct relationship between price and quantity demanded (according to the law of supply).

 Individual supply and Market supply

Individual supply is shows the relationship between the quantity of a product supplied by a single seller and its price.

Market supply is shows the relationship between the total quantity of a product supplied by additional all quantities supply by all seller in the market and its price.

To discuss about the market supply, assume only have two sellers in the market, for example Zaki and Epin. Table 2.5 shows both the individual supply and market supply for the apples.

  Table 2.5: The individual and market supply for apples

Combination	Price (RM)	Zaki (units)	Epin (units)	Market Supply (units)
A	80	8	10	18
B	60	6	8	14
C	40	4	6	10
D	20	2	4	6

 

Plot the supply curve based on the information given in table 2.5 to show the market supply in a graph paper (see figure 2.7). 

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Change in Quantity Demanded (movement) and Change in Demand (Shift)

Change in Quantity Demanded (Movement)

   i.            Situation

Movement along the demand curve

 ii.            Factor

Occurs when price of a product changes

(own price of the product)

Others factors remain constant

iii.            Evidence

·   Upward movement

Decrease in quantity demanded (contraction)

Example; from B to A

·   Downward movement

Increase in quantity demanded

(expansion)

Example; form B to A

Change in Demanded (Shift)

  i.            Situation

Shift in the demand curve (new curve)

 ii.            Factor

Occurs when there are changes in other factors such as population, income, price of related goods, etc.

Price of the product remains constant

iii.            Evidence

Increase or decrease in demand curve

·   Demand curve shift to right (increase) if;

D₀ → D₁

1.    Price of substitutes goods increases

2.    Price of complement goods decrease

3.    Income increases (Normal Goods)

4.    Expected future price increases

5.    Number of buyers increase

·   Demand curve shift to left (decrease) if;

D₀ → D₂

• Price of substitutes goods decreases
• Price of complement goods increase
• Income decreases (Normal Goods)
• Expected future price decreases
• number of buyers decrease

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