Fundamentals of Economics and

feasibility studies
(HU200)
Chapter
(II)

Supply
and
Demand
INTRODUCTION

One of the most basic concepts of

economics is Supply and Demand.
• Supply is how much of something is
available.
• Demand is how much of something
people want.
INTRODUCTION

In economics, supply and demand is the

relationship between:
• the quantity of a commodity that
producers wish to sell and
• the quantity that consumers wish to buy.
INTRODUCTION

• The price that makes quantity demanded

equal to quantity supplied is called
the equilibrium price.
• It occurs where the demand and supply
curves intersect.
INTRODUCTION
Supply is defined as

a quantity of a commodity offered by

the producers to be supplied at a
particular price and at a certain time
Individual supply
• It refers to the quantity of a commodity which
a firm is willing to produce and offer for sale.
• An individual supply schedule shows the
different quantities of a commodity that a
producer of a firm would offer for sale at
different prices.
Market Supply
• The quantity which all producers are willing to
produce, and sell is known as market supply.
• A market supply schedule shows the various
quantities of a commodity that all the firms
are willing to supply at each market price
during a specified time period.
‫اﻟﺳﻌر ﺑﺎﻟدﯾﻧﺎر )‪Price (P‬‬ ‫اﻟﻛﻣﯾﺎت اﻟﻣﻌروﺿﺔ ﺑﺎﻟﺻﻧدوق‬
‫)‪Quantity Supplied (QS‬‬

‫‪10‬‬ ‫‪80‬‬
‫‪15‬‬ ‫‪100‬‬
‫‪20‬‬ ‫‪120‬‬
‫‪25‬‬ ‫‪140‬‬
‫‪30‬‬ ‫‪160‬‬
‫‪35‬‬ ‫‪180‬‬
‫‪40‬‬ ‫‪200‬‬
 Factors affecting supply
• Price of the commodity
• Goals of the firm
• Number of firms in the market
• State of Technology
• Conditions of production
• Expectations
• Price of inputs
• Government policies and regulations
• Natural factor
 Price of the
commodity
• When the price of a commodity in the
market rises, seller increases the quantity.
• The cost of production remaining constant
the higher will be the profit margin.
• This will encourage the producers to supply
more at higher prices.
• The reverse will happen when the price fall.
 • Firms may try to work on various goals for
eg. Profit maximization, sales maximization,
Goals of the firm
employment maximization.
• If the objective is to maximize profit, then
higher the profit from the sale of a
commodity, the higher will be the quantity
supplied by the firm and vice-versa.
• Thus, the supply of goods will also depend
upon the priority of the firm regarding
these goals and the extent to which it is
prepared to sacrifice one goal to the other.
 Number of firms in the market
• Since the market supply is the sum of the
supplies made by individual firms, hence the
supply varies with changes in the number of
firms in the market.
• Some decreases in the number of firms
reduces the supply.
• If advanced technology
is used to produce a
commodity, it reduces
its cost of production
and increases the
supply.
• On the other hand, the
supply of those goods
will be less whose
production depend on
unfair and old
technology.
• The most significant factor Conditions of
here is the state of
technology. If there is production
a technological
advancement in one good's
production, the supply
increases.
• Other variables may also
affect production conditions.
For instance, for agricultural
goods, weather is crucial for it
may affect the production
outputs.
 Expectations
Sellers' concern for future
market conditions can
directly affect supply.

• If the seller believes that the demand for his

product will sharply increase in the
foreseeable future the firm owner may
immediately increase production in
anticipation of future price increases. The
supply curve would shift out.
Price of inputs
• Inputs include labor, energy and
raw materials.
• If the price of inputs increases
the supply curve will shift left as
sellers are less willing or able to
sell goods at any given price.
• For example, if the price of
electricity increased a seller may
reduce his supply of his product
because of the increased costs
of production.
Government policies
and regulations • Government
intervention can have
a significant effect on
supply.
• Government
intervention can take
many forms including
environmental and
health regulations,
hour and wage laws,
taxes, electrical and
natural gas rates and
land use regulations.
 Natural factor

• In case of natural
disorders flood, drought,
etc. the supply of a
commodity especially
agricultural products is
adversely affected.
Price Elasticity
 Elasticity of supply is
defined as the degree of
responsiveness of
quantity supplied of a
commodity due to
change in its price.

Price Elasticity of Supply

 Price Elasticity of Supply
Price Elasticity of supply (es)

= (∆q /q x 100) / (∆p /p x 100)

= (∆ q/ ∆ p) x (p/q)
Where ∆ = change,
• q = original quantity supplied,
• p = original price.
 Price Elasticity of Supply
• Es= (∆ q / q) ÷ (∆ p / p)

• Es= ((Q1 − Q0 ) / Q0) ÷ ((P1 - P0)/ P0)

 Price Elasticity of Supply
A firm’s market price increases from £1 to £1.10,
and its supply increases from 10m to 12.5m.
sol
𝒑𝒑𝟎𝟎 = 1 , 𝒑𝒑𝟏𝟏 = 1 .10 𝒒𝒒𝟎𝟎 =10 , 𝒒𝒒𝟏𝟏 = 𝟏𝟏𝟏𝟏. 𝟓𝟓
Price Elasticity of supply (PES) =
PEs= ((Q1 − Q0 ) / Q0) ÷ ((P1 - P0)/ P0)
PEs= ((12.5− 10 ) / 10) ÷ ((1.10 - 1)/ 1)
( (2.5 /10) x 100 )/ ( (0.1 /1) x 100 )
 Elasticity of Supply Curve
According to the different kinds of
responsiveness of commodities, the price
elasticities of supply are categorized into five
types.
• perfectly elastic
• relatively elastic
• perfectly inelastic
• relatively inelastic
• unit-elastic supply curve
 Elasticity of Supply Curve
Price elasticity of Supply (eS)

Types of Price Elasticity

If es = ∞, perfectly elastic Supply.
If es > 1, relatively elastic Supply.
If es = 1, unitary elastic Supply.
If es <1, relatively inelastic Supply.
If es = 0, perfectly inelastic Supply.
Elasticity of Supply Curve
 Elasticity of Supply Curve
Perfectly elastic
Along S, firms will
supply any amount of
output demanded at
price p, but will supply
none at prices below p.
(if it has an infinite supply at
a particular price and even
a slight change in this price
brings the supply down to
zero)
 Elasticity of Supply Curve
Perfectly inelastic
S' shows that the
quantity supplied is
independent of the price.
(Supply remains unmoved
in response to any change
in the price. In other words,
the supply of such a
commodity always remains
constant no matter what the
price is)
 Elasticity of Supply Curve
Unit-elastic supply
curve
Any percentage change
in price results in the
same percentage
change in quantity
supplied.
(percentage change in
quantity supplied is equal to
the percentage change in
price )
 Elasticity of Supply Curve

Relatively in elastic
supply
es < 1
the percentage
change in quantity
supplied changes by
a lower percentage
than the percentage
of price change
 Elasticity of Supply Curve

Relatively elastic
supply es > 1
where the quantity
supplied changes
by a larger
percentage than
the price change.
 Determinants of Elasticity of
Supply
Nature of the commodity:
 The supply of durable goods can be increased or
decreased effectively in response to change in price
and hence durable goods are relatively elastic.
 On the other hand, the perishable goods cannot be
stored and thus supply cannot be altered
significantly in response to change in their price.
 Hence the price of the perishable goods is relatively
less elastic.
 Determinants of Elasticity of
Supply
Time Factor:
 A price change may have a small response on the
quantity supplied because output may change by
small quantity in the short period since the
production capacity may have been limited.
 Therefore, in the short run supply tends to be
relatively inelastic.
 On the other hand, in the long run production
capacity may be increased or supply may also be
raised therefore in the long run supply is elastic.
 Determinants of Elasticity of
Supply
Availability of facility for expanding output:
 If producers have sufficient production facilities
such as availability of power, raw materials, etc,
they would be able to increase their supply in
response to rise in price.
 On the other hand, if there is a shortage of such
facilities then expansion of supply will not be
possible due to rise in price.
 Determinants of Elasticity of
Supply
Change in cost of production:
 Elasticity of supply depends upon the change in
cost. If an increase of output by a firm in an industry
causes only a slight increase in the cost, then
supply will remain elastic.
 On the other hand, if an increase in output bring
about a large increase in cost due to rise in price of
inputs etc, then supply will be relatively inelastic.
 Determinants of Elasticity of
Supply
Nature of inputs:
 Elasticity of supply depend upon the nature of
inputs to produce a commodity.
 If the production requires inputs that are easily
available, then its supply will be relatively elastic.
 On the other hand, if it uses specialized inputs then
its supply will be relatively inelastic.
 Determinants of Elasticity of
Supply
Risk Taking:
 If entrepreneurs are willing to take risk, then supply
will be more elastic and if they are reluctant to take
risk then supply would be inelastic.
 problem1
• Suppose that the price elasticity of supply for
oil is 0.1. Then, if the price of oil rises by 30
percent, the quantity of oil supplied will
increase

A. By 300 percent
B. By 30 percent
C. By 3 percent
D. By 0.3 percent
 Solution problem1
% 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠
• PES=
% 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝
% 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠
• 0.1=
30%
% 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠=3%
 problem2
• If the elasticity of supply of a good is zero,
then its
A. demand curve must be vertical.
B. supply curve is positively sloped
C. supply curve is vertical.
D. supply curve is horizontal.
 problem2
• If the elasticity of supply of a good is zero,
then its
A. demand curve must be vertical.
B. supply curve is positively sloped
C. supply curve is vertical.
D. supply curve is horizontal.
 problem3
• A horizontal supply curve indicates an
elasticity of supply that equals
A. Infinity
B. -1
C. 0
D. 1
 problem4
• A rise in the price of cabbage from $10 to $14
per bushel, increases the quantity supplied
from 4,000 to 6,000 bushels. The elasticity of
supply is
A. 1.0
B. 1.7
C. 0.7
D. 1.25
 Solution problem4
• Es= ((Q1 − Q0 ) / Q0) ÷ ((P1 - P0)/ P0)
Q1=6000 Q0=4000
P1=14 p0=10
Es= ((6000 − 4000 ) / 4000) ÷ ((14 - 10)/ 10)
Es=0.5/0.4=1.25
 problem5
• If a 3 percent increase in price results in a 5
percent increase in the quantity supplied, the
elasticity of supply is
A. 1.20
B. 1.66
C. 0.30
D. 0.60