CHAPTER 3

Supply

I. Introduction

Like demand, supply is a common term that has accumulated many meanings.
Supply is commonly known as a quantity of output produced by a producer. But in
economics, supply has just one meaning.

Supply constitutes the one side of the market, of which the other one is demand.
Firms engage in production, and we assume that they do so for profit. Successful firms
make profits because they are able to sell their products for more than it costs to
produce them.

II. Intended Learning Outcomes

1. Explain the Law of supply and its related terms and concepts
2. Identify the determinants of supply
3. Analyze the supply behaviour of producers or suppliers brought about by
the changes in the prices of commodities.
4. Describe the behaviour of producers or suppliers as affected by the
changes in the non-price determinants of demand.
5. Plot the supply curves of supply schedule with shifts
6. Show appreciation on the roles played by the producers or suppliers in
the production of goods and services.

III. Learning Topic Contents

Basic Concept in Supply

 The supply of a good is defined as the schedule of various quantities of
commodities that the producers/sellers are willing and able to produce/offer
for sale on the market at a given price, time and place, other factors are held constant.

Just like demand, supply can also be analyzed through supply schedule, supply
curve and a supply function.

a) Supply schedule is a table or list listing then various prices of a product and the
specific quantities supplied at each of these prices at a given time.

Table 2: Supply schedule Supply curve

Price Quantity Supplied

(Per Kilo) (Per Kilo)

P 45 180
40 150
35 120
30 90
Figure 3
25 60
20 30
b) Supply curve. A graph illustrating how
much of a product a firm will supply at a different prices.

Usually the supply curve will be upward sloping to the right, since a higher price
will induce sellers to place more of the good on the market and may induce
additional sellers to come into the field

 Law of supply. The law states that “as price of a good or service that producers
are willing and able to offer for sale at each possible price during a period of time
rises, the quantity of that good or service will rise, and as price decreases,
quantity supplied also decreases, everything else is held constant.
The driving force behind this behavior of producers bringing about the law of
supply is simply of the Profit motive. No producer/supplier/seller in his mind would
offer his goods without corresponding economic benefits (profits).
Factors affecting in Supply
1. Price factor - a. Price of the good itself

2. Non - price factor

a. resource prices,
b. prices of related goods in production,
c. technology,
d. expectations and
e. number of sellers.

Change in Quantity Supplied and Change in Supply

Figure 4.A

Salient characteristics in the Change in Quantity Supplied

1. This is caused by a change in the good’s own price alone, ceteris paribus.
2. There is only one movement along the supply curve. An upward movement will
indicate an increase in the quantity supplied, vice versa.
3. Sometimes, the word expansion or contraction will be used to show an increase
or decrease in the amount supplied, respectively.

Change in Supply
 Figure 4.B

1. This is caused by other factors and not by price.

2. There is a shift in the supply curve itself. A shift to the right means an
increase in supply, vice versa.
3. The terms used are rise or increase and fall or decrease.

c) Supply Function
According Avila-Bato, Malveda, and Viray (2016), a supply function is a
form of mathematical notation that links the dependent variable (quantity
supplied), with the various independent variables which determine the quantity
supplied. Among these factors are the prices of the commodity itself, number of
sellers in the market, price of the farm inputs, technology, weather conditions, etc.
Thus, we can state in a mathematical function as follows:
Q = f (product’s own price, number of sellers, price of production
inputs, etc)
And given the supply function, we can now derive the supply equation :
: Qs = a+ bP

Where: Qs= quantity supplied at a particular price

a = intercept of the supply curve
b = slope of the supply curve
P = price of the good sold
 The positive sign (+) in the supply equation also represents the direct relationship
between price and the quantity supplied in the Law of Supply.

IV. SELF-LEARNING ACTIVITIES

1. Identify the factors considered by sellers in producing a particular commodity or

product?

2. Which of these factors is considered the most important among sellers? Why?

3. Read the story below and construct a supply schedule out of it. The supply schedule
comprises the price and quantity columns.

Mang Juan harvested 4,000 kilos of single –bulb onion from his half-
hectare farm last March. He immediately sold 200 kilos at Php 10/kg to pay his hired
workers. After a week, he sold 300 kilos at Php 25/kg to pay his debt from his sister.

For the family to have money to spend for the coming barangay fiesta, he
sold 450 kilos at Php 35.00/kilo. Good for Mang Juan because the price went down to
Php 30 after two days when the tradres knew that most of the farmers will be forced to
sell to have cash during the festivity. Mang Juan decided not to sell this time.

Last June, the price went up to Php 50/kg, Mang Juan had the feeling that
after the enrolment period, the price will again go up. He sold only 550 kilos. He opted
to sell more in July.

He was right, prices went up to Php 60. A lucrative price indeed! He sold
600 kilos. He decided to sell the rest of his harvest during the lean supply months
where he is very sure that prices will rise again.

Direction: Answer the following:

1. Complete the Supply schedule below

Condition Price Quantity Supplied

A
B
C
D
E

2. Plot the data on a graph

3. How will you relate price and quantity supplied? Explain the relationship.

V. REFERENCES

Avila-Bato, Malveda,&Viray (2016). Microeconomics:Simplified (2016). Anvil Publishing,

Inc. Mandaluyong City, Philippines

Marcelino, Viray, Avila-Bat0.& Bautista (2010), Principles of Economics with Taxation

and Agrarian Reform .National Bookstore, Mandaluyong City, Philippines

Azarcon, E. Et al. (2008) Principles of Economics with Taxation and Agrarian

reform.Valencia Educational Supply, Baguio City.

Costales,A, et. Al (2000). Economics: Principles and applications. JMC Press Inc.
Quezon City

Fajardo, F. (2001).Agricultural Economics. 4th edition, Rex Bookstore Inc. Sampaloc,

Manila
Fajardo, F. (1997).Microeconmics. Rex Bookstore company, Manila,Philippines
https://www.bing.com/images/search on April 28, 2018
Market Equilibrium
I. Introduction
After studying demand and supply concepts and their related equations and
graphs, it is now time for us to learn about their greater significance in their perspective
roles at the heart of microeconomics: the market. The word market here considered
market where it is composed of two main parties: they buyers (consumers) and the
sellers (producers or suppliers). These buyers are represented in microeconomics as
the demand side of the market, while all sellers and producers are collectively
represented the supply side of the market.
The dynamic interplay of the market results to what we call transactions, where
buyers and sellers agree on a certain price to consummate a transaction.
Hypothetically, when all buyers and sellers agree on the same price, we achieve what is
termed market equilibrium.

II. Intended Learning Outcomes

1. Explain the basic concepts of market equilibrium;

2. Compute the equilibrium prices and quantities of given equilibrium problem;
3. Distinguish a demand gap from a supply gap;
4. Plot demand and supply equations in a single graph and highlight the
occurrence of equilibrium, demand and supply gaps;
5. Solve problems related to equilibrium analysis; and
6. Internalize the interplay between demand and supply in the market.

III. Learning Topic Contents

Basic Concepts in MARKET EQUILIBRIUM Analysis

Market Equilibrium is the state in which both price and quantity are at the levels at
which the amount firms want to supply matches exactly the amount consumers want to
buy. That price is called the equilibrium price and the market clearing amount is called
the equilibrium quantity.

Table 2: Hypothetical Supply and Demand Schedule of X per Week

Quantity Demanded Price Quantity Supplied

(in Kilos) (per Kilo) (in Kilos)

100 45 180
150 40 150
200 35 120
250 30 90
300 25 60
350 20 30

Figure 5

 Surplus is a quantity supplied that is larger than the quantity demanded at a

given price; it occurs whenever the price is greater than the equilibrium price.
When there is a surplus, the tendency is for the sellers to lower the market prices
in order for the goods to be easily disposed in the market. This means that there
 is a downward pressure to price when there is a surplus in order to restore
equilibrium in the market.
 Shortage is a quantity supplied that is smaller than the quantity demanded at a
given price; it occurs whenever the price is less than the equilibrium price.
Generally, shortage exists below the equilibrium point. When there is shortage,
there is an upward pressure to prices to restore equilibrium in the market.

Minimum Price Policy vs. Maximum Price Policy

 Minimum Price Policy or floor price– a minimum limit beyond which the price
of a commodity is not allowed to fall. It is a legal minimum price imposed by the
government. This is undertaken if a surplus in the economy persists. Generally,
floor prices are imposed by the government on agricultural products especially
when there is bumper harvest.
 Maximum Price Policy or ceiling price- is the maximum limit at which the price
of commodity is set. It is the legal maximum price imposed by the government.
Price ceiling is utilized by the government if there is a persistent shortage of
goods (basic commodities like food) in the economy. This is usually done by the
government after the occurrence of a calamity like typhoon or flood.

 The Equilibrium Analysis

The Equation System: Demand Equation : Qd= a – bP

Supply Equation : Qs = a+bP
Equilibrium condition : Qd=Qs
Given : Qd = 68 – 6P
Qs = 33 + 10P

Direction: Solve for Price Equilibrium and Equilibrium Quantity (Qd = Qs)

68 – 6P = 33 + 10P Qd = 68 – 6P Qs = 33 +10P
68 - 33 = 10P + 6P = 68 – 6 (2.19) = 33+10(2.19)
35 = 16P = 68 –13.14 = 33+21.9
 = 35/16P = 54.86 = 54.9

Pe = 2.19

IV. Self-learning Activities

A. Concepts on equilibrium analysis

____1. At the heart of microeconomic analysis is the behavior of

the
a. Buyers b. Sellers c. Market d. Producers
____2. They are represented in microeconomics as the demand side of
the market
a. Buyers b. Sellers c. Market d. Producers
____3. They are represented in microeconomics as the demand side of
the market
a. Buyers b. Sellers c. Market d. Producers
____4. It is this point that the agreeable price for both buyers and sellers
are the same, and their respective quantity demanded and
supplied are also the same.
a. demand gap
b. supply gap
c. intersection
d. market equilibrium
____5. In equilibrium analysis, this simply means a distance or
difference between two quantities, given the same price.
a. inequality b. Void c. Space d. gap
 B. Solve the equilibrium price and equilibrium quantity using this
two equations :
1. a) Qd = 10 - 3P 2. a) D= 700- 20P
b) Qs= 4 - 2P b) S = 100 +10P

V. REFERENCES

Avila-Bato, Malveda,&Viray (2016). Microeconomics:Simplified (2016). Anvil Publishing,

Inc. Mandaluyong City, Philippines

Marcelino, Viray, Avila-Bat0.& Bautista (2010), Principles of Economics with Taxation

and Agrarian Reform .National Bookstore, Mandaluyong City, Philippines

Azarcon, E. Et al. (2008) Principles of Economics with Taxation and Agrarian

reform.Valencia Educational Supply, Baguio City.

Costales,A, et. Al (2000). Economics: Principles and applications. JMC Press Inc.
Quezon City

Fajardo, F. (2001).Agricultural Economics. 4th edition, Rex Bookstore Inc. Sampaloc,

Manila

Fajardo, F. (1997).Microeconmics. Rex Bookstore company, Manila,Philippines

https://www.bing.com/images/search on April 28, 2018