TOPIC 3: The Price System

SUPPLY
Supply as the quantity of goods and services producers are

able and willing to offer for sale at a particular price, time

and place. Supply represents the exact amount offered for

sale by the producer and not the total products produced.

Supply schedule: a supply schedule depicts the relationship

between price and quantity supplied. It records how much is

supplied to the market given the price at a particular period.

Table 3: A Producer’s Supply Schedule
Price of the commodity Quantity supplied

(N)

10 800

9 700

8 600

7 500

6 400

5 300

1
Supply Curve: is the graphical representation of the market supply schedule.

P
S

0 Q

There is direct relationship between price and quantity

supplied.

Market Supply Schedule is the total of all individual supply

curves
Table 4: Market Supply Schedule
Price of the commodity (N) Quantity supplied by Mr. A Quantity supplied by Mr. B

10 800 1000

9 700 800

8 600 600

7 500 400

6 400 200

5 300 100

2
Market Supply Curve: is the graphical representation of the market supply

schedule.

P
S

0 Q

Factors affecting supply

1. Price of the commodity in question: Unlike demand,

there is a direct relationship between the price of a product

and its supply. If the price of a product increases, then the

supply of the product also increases and vice versa. Change in

supply with respect to the change in price is termed as the

variation in supply of a product.

Speculation about future price can also affect the supply of a

product. If the price of a product is about to rise in future,

3
the supply of the product would decrease in the present

market because of the profit expected by a seller in future.

However, the fall in the price of a product in future would

increase the supply of product in the present market.

2. Price of related commodities: this refers to fact that

the prices of substitutes and complementary goods also

affect the supply of a product. For example, if the price of

wheat increases, then farmers would tend to grow more wheat

than rice. This would decrease the supply of rice in the

market.

3. Number of producers: If the number of producers

producing a commodity increases, its supply will increase.

With the exit of producers, the supply would decrease.

4. Taxation: The production of the commodity is

discouraged if heavy tax on its production is imposed. On the

contrary, tax concessions encourage producers to increase

supply.

5. Government policies: the different policies of

government, such as fiscal policy and industrial policy, has a

4
greater impact on the supply of a product. For example,

increase in tax on excise duties would decrease the supply of

a product. On the other hand, if the tax rate is low, then the

supply of a product would increase.

6. Cost of production: The supply of a product and cost of

production are inversely related to each other. If the cost of

production increases, the supply of a product would decrease

and vice versa. For example, a seller would supply less quantity

of a product in the market, when the cost of production

exceeds the market price of the product.

7. Level of technology: A better and advanced technology

increases the production of a product, which results in the

increase in the supply of the product. For example, the

production of fertilizers and good quality seeds increases the

production of crops. This further increase the supply of food

grains in the market.

8. Price of factors of production: If the factors such as

raw material man, equipment, and machines, are available in

sufficient quantity and at lower price, then there would be

5
increase in production. This would increase the supply of a

product in the market. For example, availability of cheap labor

and raw material nearby the manufacturing plant of an

organization would help in reducing the labor and

transportation costs. Consequently, the production and supply

of the product would increase.

9. Weather: this implies that climatic conditions directly

affect the supply of certain products. For example, the supply

of agricultural products increases during raining season.

However, the supply of these products decreases when the

weather is dried. Some of the crops are climate specific and

their growth purely depends on climatic conditions.

10. Transport Conditions: better transport facilities

increase the supply of products. Transport is always a

constraint to the supply of products, as the products are not

available on time due to poor transport facilities. Therefore,

even if the price of a product increases, the supply would not

increase. In Nigeria where road transports are poorly

maintained, it makes it difficult to reach the destination on

6
time. This may result in the damage of most of the products

during the journey, which can cause heavy loss for a seller. In

addition, the seller can also lose his/her customers because of

the delay in the delivery of products.

Laws of supply
The laws of supply states that:

1. The higher the price the higher the quantity supplied

2. The lower the price the lower the quantity supplied

Movement along the Supply Curve

P
S

0 Q
60 120 180

7
This occurs as a result of changes in prices affecting the

quantity supplied of a particular product. In other words,

price is the sole determinant responsible for variations in the

quantity supplied. This change can either be an increase or

decrease in quantity supplied.

Shifts in supply
A shift in supply could be to the right (representing an

expansion) or a shift to the left (representing a contraction).

This will be caused by all factors affecting supply except

price.
P

S1 S0 S2

20

S1

S0 S2

0 Q
40 60 80

8
Types of Supply
1. Complementary/Joint supply: where two or more

commodities are produced together from a single source.

Example is crude oil, cocoa, palm tree, etc. increase in

demand of one commodity for example palm-oil, will bring

about increase in the production of palm kernels, brooms,

etc.

2. Competitive supply: it is when a material can be used for

more purposes. Land for example can be used for

agriculture purposes, for rearing of animals, etc. The

supply of the commodity for one purpose will greatly

affect the supply of the same commodity for other

purposes. Example is the supply of palm-oil for the

production of soap will greatly affect the production of

pomade, and also for cooking of food.

3. Composite supply: when a particular want is satisfied

from different independent sources, e.g., thirst can be

met from taking of water, minerals, milk, etc.,

9
 transportation can be satisfied through air, sea, road,

and rail.

Market equilibrium
Equilibrium occurs at the point of intersection between price

and quantity, thus an equilibrium price, and quantity is so

derived.

Market equilibrium is determined at a point of intersection

between price, quantity demanded and quantity supplied.

Mathematically,

Example 1

Given the demand equation

Qd = 10 – P ………………………………………………………... (1)

And the supply equation

Qs = -20 + 5P ………………………………………………………. (2)

Find the equilibrium price and quantity

At equilibrium DD = SS

So Qd = Qs

10 - P = -20 + 5P

Collecting like terms

10
5P + P = 10 + 20

6P = 30

P = N5

Substitute P in equation 1 or 2

For equation 1, we have

Qd = 10 – P

Qd = 10 – 5

Qd = 5

For equation 2, we have

Qs = -20 + 5P

Qs = -20 + 5 (5)

Qs = -20 + 25

Qs = 5

Equilibrium price and quantity demanded/supplied are N5 and

5 respectively.

Example 2

Qd = 25 – P ……………………………………………………… (1)

Qs = -45 + 9P ……………………………………………………. (2)

Qd = Qs
11
25 – P = -45 + 9P

9P + P = 25 + 45

10P = 70

P = N7

Substituting P in equation 1

Qd = 25 - P

Qd = 25 - 7

Qd = 18

Equilibrium price and quantity is N7 and 18 respectively.

Graphically
Price Quantity demanded Quantity supplied

150 85 190

130 95 140

120 120 120

100 140 90

60 175 75

30 200 45

12
 D S
P

Excess supply

120

D
S
Excess demand

0 Q
120

From the diagram, it is observed that at equilibrium, the price

and quantity demand or supply are N120 and 120 respectively.

There is what we called disequilibrium; when one is greater

than another. When supply is greater than demand, we have

excess supply, and this is above equilibrium. When demand is

greater than supply, we have excess demand, and this is below

equilibrium.

Excess supply: is the decrease in demand while supply remains

constant. This will lead to excess of supply over demand.

Excess demand: is the increase in demand while supply

remains constant. This will lead to excess of demand over

13
supply. As a result of excess demand, the price will fall which

will eventually lead to high demand.

Implication of excess supply and excess demand

As a result of excess supply, the price will fall which will

eventually lead to high demand. Excess demand will lead to

shortage in supply, and this will bring about rise in the price of

a commodity, which will bring about increase in supply

How is equilibrium price determined in a market? When the

quantity demanded equates quantity supplied.

Changes in equilibrium price

An increase in demand: moves right and this will cause a rise

in equilibrium price, and equilibrium quantity demand will rise

P D1

D0 S

S D0 D1
0 Q

A decrease in demand: shift to the left. Both the equilibrium

price and quantity demand will fall

14
 P D0

D1 S

S D0 D1
0 Q

An increase in supply: shift of supply curve to the right. The

equilibrium price will fall and quantity supply will rise.

D S0 S1

S0 S1 D
0 Q

A decrease in supply: shift of supply curve to the left will

cause equilibrium price to rise and quantity supply will fall.

P

D S1 S0

S1 S0 D
0 Q

15
Change in demand and supply: it occurs in four ways:

a. Both demand and supply may increase

P
D1
D0 S0 S1

S0 S1 D0 D1
0 Q

b. Both demand and supply may decrease

P
D0
D1 S1 S0

S1 S0 D1 D0
0 Q

c. Demand may decrease while supply increase

P D0
D1 S0 S1

S0 S1 D1 D0
0 Q

16
d. Demand may increase while supply decrease
P
D1
D0 S1 S0

S1 S0 D0 D1
0 Q

17