Mohammad Abul Kalam Azad

Prepared
By
Assistant Professor
DBA, NUB

Supply & Demand

LOS 01: Concept of need, want and demand?

a) States of deprivation
Needs
b) Physical- food, clothing, shelter, safety, water
c) Social - belonging and affection
d) isIndividual
A want a product- knowledge
desired by aand self-expression
customer that is not required for us to survive. So,
Wants
want is the complete opposite of need, which is essential for our survival.

Demands If a customer is willing and able to buy a need or a want, it means that they have a
demand for that need or a want

LOS 02: What is demand?

Demand in economics is how many goods and services are bought at various prices during a certain period of
time. Demand is the consumer's need or desire to own the product or experience the service. It's constrained by
the willingness and ability of the consumer to pay for the good or service at the price offered.

1. In the words of Ferguson, "Demand refers to the quantities of a commodity that the consumers are able and
willing to buy at each possible price during a given period of time, other things being equal"

2. B.R. Schiller is of the view that, "Demand is the ability and willingness to buy specific quantity of a good at
alternative prices in a given time period, ceteris paribus."

3. According to Sullivan, Arthur; Demand is a buyer's willingness and ability to pay a price for a specific quantity
of a good or service. Demand refers to how much (quantity) of a product or service is desired by buyers at
various prices.

4. In the words of Jain & Ohri, "Demand for a commodity refers to the desire to buy a commodity backed with
sufficient purchasing power and the willingness to spend."

So we can say that Demand for a commodity refers to the desire backed by ability to pay and willingness to buy
it.

LOS 03: What is law of demand and what is its assumption?

Law of Demand In microeconomics, the law of demand states that, other things remaining the same, as the
price of a good increase (↑), quantity demand decreases (↓), conversely as the price of a good decreases (↓),
quantity demanded increases (↑). In other words, There is an inverse relationship between price of the
commodity and its quantity demanded.
 Mohammad Abul Kalam Azad
Prepared
By
Assistant Professor
DBA, NUB

Law of demand has been defined by some eminent economists as under:

(1) According to Samuelsson, "Law of Demand states that people will buy more at lower prices and buy less at
higher prices, ceteris paribus, or other things remaining the same."

(2) Marshall says, "The Law of demand states that amount demanded increases with a fall in price and
diminishes when price increases, other things being equal" So if other things remain unchanged,

Law of demand is:

1. If price increases quantity demand decreases and

2. If price decreases quantity demand increases.

The main assumptions of the demand Law:

1. No change in the consumer's income
2. No change in consumer's tastes and preferences
3. No changes in the prices of other goods
4. No new substitutes for the goods have been discovered
5. No change in size of population
6. No exception regarding future change in price.

LOS 04: Define demand function.

The demand function is a mathematical representation of the maximum rate of demand as the dependent
variable and its various determinants. The demand for any commodity mainly depends on the price of that
commodity. The other determinants include price of related commodities, the income of consumers, tastes and
preferences of consumers, and the wealth of consumers. Hence the demand function can written as

Dx = F (Px, Ps, Y, T, W)

Where,
Dx = demand for good x
Px = price of good X
Ps = price of related goods
Y = income
T= tastes and preferences of the consumers
W = wealth of the consumer.

LOS05: What are the exceptions to the law of demand?

Exceptions to the Law of Demand:

The Law of demand is a general statement telling that prices and quantities of a commodity are inversely
related. There are certain peculiar cases in which the law of demand will not hold good. In those cases, more will
be demanded at a higher price and less will be demanded at a lower price. The demand curves in those cases
slope upwards showing a positive relationship between price and quantity demanded as shown in figure 3.
When the price increases from OP to OP1, quantity demanded also increases from OQ to OQ1 and vice versa. DD
is the exceptional or abnormal demand curve.
 Mohammad Abul Kalam Azad
Prepared
By
Assistant Professor
DBA, NUB

The following is the list of few exceptions to the law of demand.

Quantity Demanded

Figure :3

1. Giffen goods: Some special varieties of inferior goods are termed as Giffen goods. Cheaper varieties of this
category like bajra, cheaper vegetable like potato come under this category. Sir Robert Giffen first observed that
people used to spend more their income on inferior goods like potato and less of their income on meat. But
potatoes constitute their staple food. When the price of potato increased, after purchasing potato they did not
have so many surpluses to buy meat. So the rise in price of potato compelled people to buy more potato and
thus raised the demand for potato. This is against the law of demand. This is also known as Giffen paradox.

2. Veblen effect: Veblen goods are named after American economist Thorstein Veblen, who first identified
conspicuous consumption. According to Veblen, rich people by certain goods become of its social prestige. High
quality and other luxurious goods are purchased by rich people due to its high prestige value. So it is an
exception to the demand.

3. Conspicuous necessities: Certain things become the necessities of modern life. So we have to purchase them
despite their high price. The demand for T.V. sets, automobiles and refrigerators etc. has not gone down in spite
of the increase in their price. These things have become the symbol of status. So they are purchased despite
their rising price. These can be termed as "U" sector goods.

4. Change in income: The demand for goods and services is also affected by change in income of the consumers.
If the consumer's income increases, they will demand more goods or services even at a higher price. On the
other hand, they will demand less quantity of goods and services even at a lower price if there is decrease in
their income. It is against the law of demand.

5. Emergencies: Emergencies like war, famine etc. negate the operation of the law of demand. At such times,
households behave in an abnormal way. Households accentuate scarcities and induce further price rises by
making increased purchases even at higher prices during such periods. During depression, on the other hand, no
fall in price is a sufficient inducement for consumers to demand more.

6. Future changes in prices: Households also act speculators. When the prices are rising households tend to
purchase large quantities of the commodity out of the apprehension that prices may still go up. When prices are
expected to fall further, they wait to buy goods in future at still lower prices. So quantity demanded falls when
prices are falling.
 Mohammad Abul Kalam Azad
Prepared
By
Assistant Professor
DBA, NUB

7. Change in fashion: A change in fashion and tastes affects the market for a commodity. When a broad toe
shoe replaces a narrow toe, no amount of reduction in the price of the latter is sufficient to clear the stocks.
Broad toe on the other hand, will have more customers even though its price may be going up.

LOS 06: What are the factors that determine the demand for goods?

The seven factors which determine the demand for goods are as follows:

1. Tastes and Preferences of the Consumers

2. Income of the buyer

3. Price of the Related Goods or services

4. The Number of Consumers in the Market

5. Changes in Propensity to Consume Consumers' Expectations with

regard to Future Prices

7. Income Distribution.

1. Tastes and Preferences of the Consumers: An important factor which determines demand for a good is the
tastes and preferences of the consumers for it. A good for which consumers' tastes and preferences are greater,
its demand would be large and its demand curve will lie at a higher level.

2. Income of the Buyer: The demand for goods also depends upon incomes of the people. The greater the
incomes of the people the greater will be their demand for goods. In drawing a demand schedule or a demand
curve for a good we take incomes of the people as given and constant. When as a result of the rise in incomes of
the people, the demand increases, the whole of the demand curve shifts upward and vice versa.

3. Price of the Related Goods or Services: The demand for a good is also affected by the prices of other goods,
especially those which are related to it as substitutes or complements. When we draw a demand schedule or a
demand curve for a good we take the prices of the related goods as remaining constant.

4. The Number of Consumers in the Market: We have already explained that the market demand for a good is
obtained by adding up the individual demands of the present as well as prospective consumers or buyers of a
good at various possible prices. The greater the number of consumers of a good, the greater the market demand
for it.

5. Changes in Propensity to Consume: People's propensity to consume also affects the demand for them. The
income of the people remaining constant, if their propensity to consume rises, then out of the given income
they would spend a greater part of it with the result that the demand for goods will increase.

6. Consumers' Expectations with regard to Future Prices: If due to some reason, consumers expect that in the
near future prices of the goods would rise, then in the present they would demand greater quantities of the
goods so that in the future they should not have to pay higher prices.
 Mohammad Abul Kalam Azad
Prepared
By
Assistant Professor
DBA, NUB

7. Income Distribution: Distribution of income in a society also affects the demand for goods. If distribution of
income is more equal, then the propensity to consume of the society as a whole will be relatively high which
means greater demand for goods. On the other hand, if distribution of income is more unequal, then propensity
to consume of the society will be relatively less; for the propensity to consume of the rich people is less than
that of the poor people.

LOS 07: Define individual demand schedule and the market demand schedule

Demand schedule: Demand schedule is that schedule which expresses the relation between different quantities
of the commodity demanded at different prices. According to Samuelson, "The table relating to price and
quantity demanded is called the demand schedule." Demand Schedule is of two types:

1. Individual Demand Schedule, and

2. Market Demand Schedule.

1. Individual Demand Schedule: Individual demand schedule is defined as the table which shows quantities of
a given commodity which an individual consumer will buy at all possible prices at a given time. Table 1
shows Individual demand schedule. It indicates different quantities of lee Cream that are demanded by a
consumer at different prices:
Table 1 Individual Demand Schedule
Price per unit (in Tk.) Quantity Demanded (Units)
1 4
2 3
3 2
4 1
It is evident from the above schedule that as the price of Ice cream increases, its demand tends to contract.
When price of Ice cream is Re. 1.00 demand is for 4 units and when price goes up to Tk. 4.00 demand contracts
to 1 unit only.

2. Market Demand Schedule: In economics, a market demand schedule is a tabulation of the quality of a good
that all consumers in a market will purchase at any given price. Generally, there is an inverse relationship
between the price and the quantity demanded.

In the words of Liebhafsky, "Market demand schedule is defined as the quantities of a given commodity
which all consumers will buy at all possible prices at a given moment of time." In every market there are
many consumers of a commodity, e.g. sugar. The schedule indicating the quantity demanded by all the
consumers of a commodity collectively at its different prices is called market demand schedule. In other
words, it shows the aggregate demand of all consumers at different prices of one particular commodity at a
given time. Table 2 represents market demand schedule. The schedule is based on the assumption that
there are, in all, two consumers 'A' and 'B' of commodity X'. By aggregating their individual demand, the
market demand schedule has been constructed.
Table 2 Market Demand Schedule
Price of Commodity "X (in Tk.) Demand of A Demand of B Market Demand (Units)
1 4 5 4+5=9
2 3 4 3+4=7
3 2 3 2+3=5
4 1 2 1+2=3
 Mohammad Abul Kalam Azad
Prepared
By
Assistant Professor
DBA, NUB

LOS 08: Illustrates a demand curve from a demand equation.

A demand curve from a demand equation:
The curve which shows the relation between the price of a commodity and the amount of the commodity that
the consumer wishes to purchase, is called demand curve.
Suppose, the demand function Qd = 10-2P. Demand schedule from the function.

Price (Tk.) Quantity of demand (Units)

4 2
3 4
2 6
Graphically Presentation,

We can see that, x axis shows the quantity of demand and y axis shows the price. Here, at point A price is tk. 4
then quantity of demand is 2 units. When price decreases tk. 3 then quantity of demand increases 4 units. Thus
we get the point B and C. By adding point A, B and C we get a demand curve. DD curve shows the negative
relation between price and quantity of demand. It’s down ward sloping from left to right.

LOS 09: Explain individual demand curve and market demand curve.

Demand Curve: The demand curve is a graphical representation of the relationship between the price of a good
or service and the quantity demanded for a given period of time. In a typical representation, the price will
appear on the left vertical axis, the quantity on the horizontal axis.

In the words of Leftwitch. "The demand curve represents the maximum quantities per unit of time that
consumers will take at various prices".

Lipsey, has defined it in these terms, "The curve, which shows the relation between the price of a commodity
and the amount of the commodity that the consumer wishes to purchase, is called demand curve."

Like demand schedule, demand curve can be:

1. Individual Demand Curve and

2. Market Demand Curve.

1. Individual Demand: Individual demand curve is a curve that shows different quantities of a commodity
demanded by an individual consumer says, 'A', at different prices. Figure 1 indicates individual demand curve.
On OX-axis is shown quantity demanded and on OY-axis, the price. DD is the demand curve. Each point on the
demand curve expresses the relation between price and demand. At a price of Tk. 4 per unit, demand is for 1
 Mohammad Abul Kalam Azad
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Assistant Professor
DBA, NUB

unit and at a price of Tk 1 per unit, demand is for 4 units. The demand curve slopes downwards from left to
right, meaning thereby that when price is high demand is low and when price is low demand is high.

2. Market Demand Curve: Market demand curve is a curve that represents the aggregate demand of all the
consumers in the market at different prices of a particular commodity. It is horizontal summation of
individual demand curves. Figure 2 shows market demand curve as based on Table 2.
In figure 2, quantity demanded is shown on OX-axis and price on OY- axis. In Figure, (i) demand curve of A';
in Figure, (ii) demand curve of 'B' and in Figure, (iii) market demand curve, are shown. When price is Tk. 4.00
per unit. A demands 1 unit and B' demands 2 units. If they are the only two consumers in the market, then
the market demand will be 1+2= 3 units. By horizontal summation of individual demand curves one gets
market demand curve. Its slope is also negative.

LOS 10: Why does Demand Curve slope downwards?

Reasons due to which the demand curve slopes downwards from left to right are stated below:

1. Law of diminishing marginal utility: A consumer always equalizes marginal utility with price. The law
states that a consumer derives less and less satisfaction (utility) from the every additional increase in the
stock of a commodity. When price of a commodity falls the consumer's price utility equilibrium is
disturbed i.e. price becomes smaller than utility.
The consumer in order to restore the new equilibrium between price and utility buys more of it so that
the marginal utility falls with the rise in the amount demanded. So long the price of a commodity falls,
the consumer will go on buying more amount of it so as to reduce the marginal utility and make it equal
with new price. Thus the shape and slope of a demand curve is derived from the slope of marginal utility
curve.
2. Income effect: Another cause behind the operation of law of demand is income effect. As the price of a
commodity falls, the consumer has to buy the same amount of the commodity at less amount of money.
After buying his required quantity he is left with some amount of money. This constitutes his rise in his
real income. This rise in real income is known as income effect. This increase in real income induces the
 Mohammad Abul Kalam Azad
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Assistant Professor
DBA, NUB

consumer to buy more of that commodity. Thus income effect is one of the reasons why a consumer
buys more at falling prices,
3. Substitution effect: When the price of a commodity falls, it becomes relatively cheaper than other
commodities. The consumer substitutes the commodity whose price has fallen for other commodities
which becomes relatively dearer. For example with the fall in price of tea, coffees. Price being constant,
tea will be substituted for coffee. Therefore the demand for tea will go up.
4. New consumers: When the price of a commodity falls many other consumers who were deprived of
that commodity at the previous price become able to buy it now as the price comes within their reach.
For example the unit of colour TV increases with a remarkable fall in price of it. The opposite will happen
with a rise in prices.
5. Multiple use of commodity: There are some commodities which have multiple uses. Their uses depend
upon their respective, prices. When their prices rise they are used only for certain selected purposes.
That is why their demand goes down.
For example electricity can be put to different uses like heating, lighting, cooling, cooking etc. If its price
falls people use it for other uses other than that. A rise in price of electricity will force the consumer to
minimize its use. Thus with a fall and rise in price of electricity its demand rises and falls accordingly.

LOS 11: Explain the changes in Demand and Quantity Demanded.

In economics the terms change in quantity demanded and change in demand are two different concepts. A
change in quantity demanded refers to a change in the specific quantity of a product that buyers are willing and
able to buy due to increase or decrease in the price of a product. In such a case, it is incorrect to say increase or
decrease in demand rather it is increase or decrease in the quantity demanded.
On the other hand, change in demand refers to increase or decrease in demand of a product due to various
determinants of demand, while keeping price at constant.
Changes in quantity demanded can be measured by the movement of demand curve, while changes in demand
are measured by shifts in demand curve. The terms, change in quantity demanded refers to expansion or
contraction of demand, while change in demand means increase or decrease in demand.

1. Expansion and Contraction of Demand:

The variations in the quantities demanded of a product with change in its price, while other factors are at
constant, are termed as expansion or contraction of demand. Expansion of demand refers to the period when
quantity demanded is more because of the fall in prices of a product. However, contraction of demand takes
place when the quantity demanded is less due to rise in the price o a product.

For example, consumers would reduce the consumption of milk in case the prices of milk increases and vice
versa. Expansion and contraction are represented by the movement along the same demand curve. Movement
from one point to another in a downward direction shows the expansion of demand, while an upward
movement demonstrates the contraction of demand.
 Mohammad Abul Kalam Azad
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Figure-11 demonstrates the expansion and contraction of demand:

When the price changes from OP to OP1 and demand moves from OQ to OQ1, it shows the expansion of
demand. However, the movement of price from OP to OP2 and movement of demand from OQ to OQ2 show
the contraction of demand.

2. Increase and Decrease in Demand: Increase and decrease in demand are referred to change in demand
due to changes in various other factors such as change in income, distribution of income, change in
consumer’s tastes and preferences, change in the price of related goods, while Price factor is kept
constant Increase in demand refers to the rise in demand of a product at a given price.

On the other hand, decrease in demand refers to the fall in demand of a product at a given price. For example,
essential goods, such as salt would be consumed in equal quantity, irrespective of increase or decrease in its
price. Therefore, increase in demand implies that there is an increase in demand for a product at any price.
Similarly, decrease in demand can also be referred as same quantity demanded at lower price, as the quantity
demanded at higher price.

Increase and decrease in demand is represented as the shift in demand curve. In the graphical representation of
demand curve, the shifting of demand is demonstrated as the movement from one demand curve to another
demand curve. In case of increase in demand, the demand curve shifts to right, while in case of decrease in
demand, it shifts to left of the original demand curve.

Figure-12 shows the increase and decrease in demand:

In Figure-12, the movement from DD to D1D1 shows the increase in demand with price at constant (OP).
However, the quantity has also increased from OQ to OQ1.
 Mohammad Abul Kalam Azad
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Assistant Professor
DBA, NUB

Figure-13 shows the decrease in demand:

In Figure-13, the movement from DD to D2D2 shows the decrease in demand with price at constant (OP).
However, the quantity has also decreased from OQ to OQ2.

LOS 12: What are the causes of increase in Demand?

In brief increase in demand occurs due to the following reasons:

1. The fashion for a good increase or people's tastes and preferences become more favorable for the
good;
2. Consumer's income increases;
3. Prices of the substitutes of the goods in question have risen
4. Prices of complementary goods have fallen
5. Propensity to consume of the people has increased
6. Owing to the increase in population and as a result of expansion in market, the number of consumers of
the goods has increased.
7. If there is any above change, demand will increase and the demand curve will shift to A an upward
position.

LOS 13: What are the causes of decrease in demand?

Causes of Decrease in Demand:

Decrease in demand may occur due to the following reasons:
1. A good has gone out of fashion or the tastes of the people for a commodity have declined.
2. Incomes of the consumers have fallen.
3. The price of the substitutes of the commodity has fallen.
4. The prices of the complements of that commodity have risen and
5. The propensity to consume of the people has declined. In another words, the propensity to save has
increased.
 Mohammad Abul Kalam Azad
Prepared
By
Assistant Professor
DBA, NUB

LOS 14: What are the factors which can shift a demand curve? or, Distinguish between change in demand.

Causes for Shift in Demand Curve:

Although price is the main factor that affects consumer demand, other factors can play a role as wellfactors
which can shift a demand curve are given below.

1. Tastes and preferences of the consumer: Demand for a commodity may change due to a change in
tastes, preferences and fashion.
2. Income of the consumer: When the income of the consumer increases, more will be demanded.
Therefore, we can say that as income increases, other things being equal, the demand for a commodity
also increases. Comforts and luxuries belong to this category.
3. Price of substitutes: Some goods can be substituted for other goods. For example, tea and coffee are
substitutes. If the price of coffee increases while the price of tea remains the same, there will be
increase in the demand for tea and decrease in the demand for coffee. The demand for substitutes
moves in the opposite direction.
4. Number of consumers: Size of population of a country is an important determinant of demand. For
instance, larger the population more will be the demand, for certain goods like food grains, and pulses
etc. When the number of consumers increases there will be greater demand for goods.
5. Expectation of future price change: If the consumer believes that the price of a commodity will rise in
the future, he may buy a larger quantity in the present Suppose he expects the price to fall, he may
defer some of his purchases to a future date.
6. Distribution of income: Distribution of income affects consumption pattern and hence the demand for
various goods. If the government attempts redistribution of income to make it equitable, the demand
for luxuries will decline and the demand for necessities of life will increase.
7. Climate and weather conditions: Demand for a commodity may change due to a change in climatic
conditions. For example, during summer, demand for cool drinks, cotton clothes and air conditioners
will increase. In winter, demand for woolen clothes increases.
8. State of business: During boom, demand will expand and during depression demand will contract.
9. Consumer Innovativeness: When the price of wheat flour or price of electricity falls, the consumer
identifies new uses for the product. It creates new demand for the product.

LOS 15: What is meant by supply?

In economics supply is an amount of something that firms, consumers, laborers providers of financial assets, or
other economic assents are willing to provide to the market place. Supply is often plotted graphically with the
quantity provided plotted horizontally and the price plotted vertically. In the goods market, supply is an amount
of a product per unit of the time that producers are willing to sell at various given prices when all other factors
are hold contact. In the labor market, the supply of labor is the amount of time per week, month or year that
individuals are willing to spend working, as a function of the wage rate.

1. In the words of Thomas, "The supply of goods is the quantity offered for sale in a given market at a given time
at various prices."

2. According to Prof. Benam, "Supply may mean the amount offered for sale per unit of time."
 Mohammad Abul Kalam Azad
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DBA, NUB

3. In the words of Deepashree, "The supply ofa commodity at a given price may be defined as the amount of it
which is actually offered for sale per unit of time at that price."

4. In the words of Samuelson, "Supply refers to the amounts of a good that producers in a given market desire
to sell, during a given time period at various prices, ceteris paribus".

So, Supply of a commodity means quantity of the commodity which is actually offered for sale at a given price
during some particular time. Like demand, supply definition is complete when it has the following elements:

a) Quantity of a commodity that the producer is willing to offer for sale;

b) Price of the commodity; and
c) Time during which the quantity is offered for sale. Example: A supply statement is: firm A supplies 50 kg
of rice at the price of Tk. 40 per kg in a month.

LOS 16: What is law of supply?

Law of Supply: Law of supply states that other things remaining the same, price and quantity supplied of a good
are directly related to each other. In other words, when the price paid by buyers for a good rises, then suppliers
increase the supply of that good in the market.

1. In the words of Dooley, "The law of supply states that other things being equal the higher the price, the
greater the quantity supplied or the lower the price, the smaller the quantity supplied."

2. According to Lipsey, "The law of supply states that other things being equal, the quantity of any commodity
that firms will produce and offer for sale is positively related to the commodity's own price, rising when price
rises and falling when price falls."

In other words, the law of supply establishes a direct relationship between price and supply. Firms will supply
less at lower prices and more at higher prices. "Other things remaining the same, as the price of commodity
rises, its supply expands and as the price falls, its supply contracts".

LOS17: What are the assumptions of the law of supply?

Assumptions of the Law of Supply:

The assumptions of the law of supply are as under:

1. No change in cost of production: It assumed that there is no change in cost of production because of
the profit decreases with the increase in cost of production and it causes the decrease in supply. If price
of a commodity decreases and cost of production also decreases, at the same time, the quantity
supplied does not decrease and profit remains constant.
2. No change in technology: It is also assumed that technique of production does not change. If better
methods of production are invented, profit increases at the previous price. The sellers increase supply
and law of supply does not operate.
3. No change in climate: It is also assumed that there is no change in climatic situation. For example, at any
place flood or earth quake occurred. The supply of goods decreases at that place at previously prevailing
price.
4. No change in prices of substitutes: If the prices of substitutes of a commodity fall then the tendency of
consumers diverts to substitutes therefore, the supply of a commodity falls without any change in price.
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DBA, NUB

5. No change in natural resources: If the quantity of natural resources (minerals, gas, coal, oil etc)
increases, the cost of production decreases. It causes to increase in quantity supplied.
6. No change in price of capital goods: The capital goods are raw material, machinery, tools etc. The cost
of production increases due to increase in prices of capital goods. It can lead to decrease in quantity
supplied.
7. No change in political situation: The amount of investment is affected by the change in political
situation of a country. The production of goods decreases due to decrease in investment.
8. No change in tax policy: It is also assumed that the taxation policy of government does not change. The
increase in taxes effects the investment and production and supply of goods decreases.

LOS 18: Explain the Exception to law of Supply

Exception to Law of Supply: According to the law of supply, if the price of a product rises, then the supply of the
product also rises and vice versa. However, there are certain conditions where the law of supply is not
applicable. These conditions are known as exceptions to law of supply. In such cases, the supply of a product
falls with the increase in price of a product at a particular point of time.

For example, there would be decrease in the supply of labor in an organization when the rate of wages is high.
The exception of law of supply is represented on the regressive supply cure or backward sloping curve. It is also
known as exceptional supply curve, which is shown in Figure-16:

In Figure-16, SMS1 is the exceptional supply curve for labor. In this case, wages are regarded as the price of
labor. It can be interpreted from the graph that as the wages of a worker increases, its quantity supplied that is
working hours decreases, which is an exception to the law of supply.

Some of the exceptions of law of supply are as follows:

i. Speculation: Refers to the fact that the supply of a product decreases instead of increasing in present when
there is an expected increase in the price of the product. In such a case, sellers would not supply the whole
quantity of the product and would wait for the increase in price in future to earn high profits. This case is an
exception to law of demand.

ii. Agricultural Products: Imply that law of supply is not valid in case of agricultural products as the supply of
these products depends on particular seasons or climatic conditions. Thus, the supply of these products cannot
be increased after a certain limit in spite of rise in their prices.

iii. Changes in Other Situations: Refers to the fact that law of supply ignores other factors (except price) that can
influence the supply of a product. These factors can be natural factors, transportation conditions, and
government policies.
 Mohammad Abul Kalam Azad
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Assistant Professor
DBA, NUB

LOS 19: What is supply functions?

A supply function is the mathematical expression of the relationship between supply and those factors that
affect the willingness and ability of a supplier to offer goods for sale.

An example would be the curve implied by Qs = f (P; Prg)

Where p is the price of the good and Prg is the price of a related good. The semicolon means that the variables
to the right are held constant when quantity supplied; plotted against the goods own price, The supply equation
is the explicit mathematical expression of the functional relationship.
A linear example is Q, = 325 + P- 30Prg.
Here 325 is the repository of all non-specified factors that affect supply for the product. The coefficient of P is
positive following the general rule that price and quantity supplied are directly related. Prg is the price of a
related good. Typically its coefficient is negative because the related good is an input or a source of input.
1. In the words of Larry Reynolds, "A supply function is a model that represents the behavior of the
producers and/or sellers in a market."
2. In the words of Vijay Luthra, "The supply function is a mathematical representation of the rate of
supply as the dependent variable and its various determinants."
3. In the words of Alexander Glaser, "A supply function represents how much of a goes or service a
producer / supplier will supply at a price of the product and combination of other factors."

The supply of a commodity mainly depends on the goal of the firm, price o the commodity, prices of inputs,
technology, price of related goods, number of suppliers, expectations of producers and government policies.
Another way we may represent the supply function in the following way,

S = f (Gf P, I, T, P, N, E, Gp, W) Here,

S = Supply;
Gf = Goal of the firm;
P = Product's own price;
I = Prices of inputs;
T = Technology;
Pr = Prices of related goods;
N = Number of suppliers;
E= Expectation of producers;
Gp = Government Policy
W = Weather

LOS 20: What is supply schedule & supply curve?

Supply Schedule and Supply Curve: The Supply schedule is a tabular statement that gives the law of supply. It
represents the different quantities of a product that a seller is willing to sell at different price level of that
product. A hypothetical supply schedule of wheat is given in Table 3.1.
Table 3.1 Supply Schedule of Wheat
Price (Tk./ Kg) Quantity Supplied (Kg per Month) Reference Point (Fig 3.9)
5 0 A
10 10 B
15 20 C
20 30 D
 Mohammad Abul Kalam Azad
Prepared
By
Assistant Professor
DBA, NUB

Supply Curve: Supply curve is a graphical representation of the direct relationship between the price of a
product or service and its quantity that producers are willing and able to supply at a given price within a specific
time period provided other things such a number of suppliers, resource prices, technology etc remain constant.
It is important to note that producers must not only be willing to supply a certain quantity at given price but
they must have the ability, in the form of production facility or other means to supply the quantity with the rise
in price in table- 3.1 the curve rises upward from left to the right as shows in fig. 3.2

LOS 21: Why Supply Curve is an Upward Slopping Curve?

Following are the causes of positive slope of supply curve or supply curve is a upward slopping because;

1. Profit: When the price of a commodity increases, the seller increases the quantity supplied. The profit of seller
increases and the aim of seller is to profit maximization.
2. Cost of production: The cost of production increases due to increase in quantity supplied. It is necessary to
increases price to maintain or increase the level of profit. Therefore, there is a direct relationship between price
and quantity supplied.
3. Future Expectations: If there is a tendency of increasing prices at present period, the sellers increase quantity
supplied for the lust of profit. It may be expectations in future to decrease prices. Now they want to maximize
their profit due to good present circumstances.

LOS 21: How to construction of market supply?

Individual and Market Supply Curves: Supply curve is a graphical representation of a supply schedule. Individual
supply cur reflects an individual supply schedule and market supply curve represents a market supply schedule.

Market supply curve is obtained by horizontal summation of all individual supply curves as shown in Fig. 3.4.

Fig. 3.4 Construction of Market Supply Curve

 Mohammad Abul Kalam Azad
Prepared
By
Assistant Professor
DBA, NUB

In the figure, quantity supplied is taken on the x-axis and price at which commodity supplied on the y-axis. SA
and SB are individual supply curves. SS is the market supply curve which is obtained by horizontally aggregating
SA and SB at each level of price.

LOS 22: What are the factors responsible to change in quantity supply of a product?
Determinants of Supply:
Following are the main factors influencing supply:
1. Goals of the Firm: The goals of a firm influence the amount of a good that producers are willing
to supply. The goal of the firms may be profit maximization or sales maximization. A firm which
aims at maximizing its profits will generally supply a less quantity of a good at a given price than
a firm aiming at sales maximization.
2. Good's own Price: As the price of a good rises, with costs and the prices of all other goods
unchanged, production of that good becomes profitable. Existing firms are, likely to expand
their outputs and eventually new firms will be attracted into the industry. Hence total supply
expands when price increases and contracts when price decreases.
3. Prices of Inputs: The prices of inputs such as labor, machines, raw materials, determine the cost
of production. If input price rises, cost of production increases and profits are reduced. This will
cause supply to fall at the given price. On the other hand, a fall of input prices will reduce costs;
resulting in an increase in profits. This will induce producers to increase the supply at the given
price.
4. Technology: Technology refers to ways in which inputs can be combined to produce a given
output. Technological improvements such as invention of a new machine will reduce costs and
increase the profits. Increased profitability induces the producers to produce more and increase
the supply.
5. Price of Related Goods: Another major determinant of supply is the price of related goods. The
related goods may be (i) Substitutes: If the price of one production substitute rises, the supply of
another substitute will decrease. For example wheat and corn are substitutes. A rise in the price
of wheat may cause a farmer to produce and supply more wheat at each possible price.
Conversely a decline in the price of wheat may induce the farmer to produce and supply more
com in the market, (ii) On the other hand, when goods are complements or joint products like
petrol and paraffin or like car and petrol, an increase in the price of one complement or joint
product yields an increase in the' supply of the other.
6. The Number of Suppliers: Other things being equal, the larger the number of suppliers, the
greater will be the market supply. The smaller the number of firms in an industry, the less the
market supply will be.
7. Expectations of Producers: Producer expectation about future market prices affects the supply
of any good. When firms expect the price of their products to be lower in the future, supply in
the current time period increases. On the other hand, if the producers expect the prices of the
goods they produce to rise in the future, they may store the current production for later sale,
reducing their supply.
8. Government Policies: The policies of the governments are also important determinants of
supply. A reduction in quotas and tariffs on foreign goods will open up the market to foreign
 Mohammad Abul Kalam Azad
Prepared
By
Assistant Professor
DBA, NUB

producers and will tend to increase the supply. The policy of liberalisation may increase the
supply.
9. Taxes and Subsidies: The changes in the taxes and subsidies also influence the supply. The
producers treat most taxes as costs. Therefore, an increase in say, sales tax will increase costs
and reduce supply. Conversely subsidies will reduce the costs and induce the producers to
increase the supply.
10. Weather: This is particularly important for the supply of agricultural products. For example a
drought will cause a decrease in the supply of wheat and a normal monsoon can cause an
increase in the supply of wheat

LOS23: Explain shift in supply curve with diagram.

A movement: Increase or Decrease in Supply

A shift in supply curve is caused by changes in factors other than the price of the good. These factors are:

a) Price of other commodities

b) State of technology
c) Cost of production
d) Government policy

A change in any of these factors causes shift in the supply curve. It is also called change in supply. In shift, a new
supply curve is drawn. A shift of the supply curve can bring about:
1. Increase in supply, or
2. Decrease in supply.

1. Increase in supply: When supply of a commodity rises due to favorable changes in factors other than
price of the commodity, it is called increase in supply.
Favorable changes imply:
a. Improvement in technique of production
b. Fall in the price of substitute goods
c. Fall in the cost of production
d. Favorable changes in government policy.

Increase in supply is graphically shown in Fig. 3.6 where quantity supplied is measured on the x-axis and
price of the commodity on the y-axis.
 Mohammad Abul Kalam Azad
Prepared
By
Assistant Professor
DBA, NUB

2. Decrease in Supply: In the figure, SS is the original supply curve. A decrease in supply is shown by
leftward shift of the supply curve from SS to S1S1, A decrease in supply shows that:

a. Either at the original price of OP, lesser units (XX1) of the good are supplied. In the original situation,
OX units were supplied.
b. Or same units OX are supplied at a higher price of OP The difference in the causes of increase and
decrease in the supply is summarized in Table 3.7.

Table 3.7 Difference in the Causes of Shift in the Supply

Increase in Supply (Rightward shift of supply) Decrease in Supply (Leftward shift of supply)
1. Improvement in techniques of production. 1. Technique of production becoming obsolete.
2. Fall in the price of substitute goods. 2. Rise in the price of substitute goods.
3. Fall in cost. 3. Rise in cost
4. Favorable changes in the government policy. 4. Unfavorable changes in the government policy.

LOS 24: What do you mean by market equilibrium price? How would you determine equilibrium price?

Market Equilibrium: Market equilibrium is a market state where the supply in the market is equal to the
demand in the market. In other words, A situation where for a particular good supply = demand. When the
market is in equilibrium, there is no tendency for prices to change. We say the market-clearing price has been
achieved.

• A market occurs where buyers and sellers meet to exchange money for goods.
• The price mechanism refers to how supply and demand interact to set the market price and amount of
goods sold.
• At most prices, planned demand does not equal planned supply. This is a state of disequilibrium because
there is either a shortage or surplus and firms have an incentive to change the price.

Market equilibrium can be shown using supply and demand diagrams. In the diagram below, the equilibrium
price is P1. The equilibrium quantity is Q1.

Figure: Market equilibrium

 Mohammad Abul Kalam Azad
Prepared
By
Assistant Professor
DBA, NUB

If price is below the equilibrium,

• In the above diagram, price (P2) is below the equilibrium. At this price, demand would be greater than
the supply. Therefore there is a shortage of (Q2 – Q1)
• If there is a shortage, firms will put up prices and supply more. As price rises, there will be a movement
along the demand curve and less will be demanded.
• Therefore the price will rise to P1 until there is no shortage and supply = demand.

If price is above the equilibrium,

• If price was at P2, this is above the equilibrium of P1. At the price of P2, then supply (Q2) would be
greater than demand (Q1) and therefore there is too much supply. There is a surplus. (Q2-Q1)
• Therefore firms would reduce price and supply less. This would encourage more demand and therefore
the surplus will be eliminated. The new market equilibrium will be at Q3 and P1.
 Mohammad Abul Kalam Azad
Prepared
By
Assistant Professor
DBA, NUB

Movements to a new equilibrium

1. Increase in demand

If there was an increase in income the demand curve would shift to the right (D1 to D2). Initially, there would be
a shortage of the good. Therefore the price and quantity supplied will increase leading to a new equilibrium at
Q2, P2.

2. Increase in supply

An increase in supply would lead to a lower price and more quantity sold.