TOPIC 3: Law of Supply

Law of Supply

  • The law of demand represents the consumers’ side, while the law of supply represents the producers’ side

  • Supply describes the behavior of firms that are producing and selling goods and services

  • It also points out the relationship between price and the amount or quantity of goods and services that producers are willing and able to sell at that price, holding all other factors constant (ceteris paribus)

  • The law of supply states that the higher the price, the higher the quantity of goods and/or services that will be produced

  • In the same way, the lower the price, the lower the quantity of goods and/or services that will be produced

  • The supply-price relationship can also be expressed using the supply equation/function, which can be written as:

    • Qs = c + dP

      • Where Qs is the quantity supplied, and P is the price

      • The term c is the intercept or the quantity supplied when the price is zero

      • The variable d is the slope of the function, which tells us the change in quantity supplied per unit change in price

      • The positive sign captures the direct relationship between price and quantity supplied


The Model of Supply and Demand

  • Demand function

    • Qd = a - bP

  • Supply function

    • Qs = c + dP

  • To achieve equilibrium

    • Qd = Qs

Change in Supply and Quantity Supplied

  • It is referred to as a change in quantity supplied since the term “supply” refers to the entire supply curve, while the term “quantity supplied” refers to a point on the supply curve

Factors Affecting the Supply

Technology

  • An improvement in technology or innovation makes the production costs of a firm decrease; hence, more output can be produced

  • Technological advancement consists of breakthroughs or new scientific discoveries in various fields

Change in the Prices of Inputs

  • An increase in the prices of inputs such as labor costs, raw materials, land, and equipment makes the production costs increase as well

  • This would make the sellers reduce the supply of their product at any given price, resulting in the supply curve shifting to the left

  • In the same manner, a decrease in the price of inputs will entice the sellers to produce more since it is less costly for them. This would make the supply curve shift to the right

Price of Related Goods

  • Raw materials and other factors of production can produce not just one type of commodity

  • There are commodities produced that share the same resources. Say there is a seller of puto and leche flan that shares common ingredients: sugar and condensed milk. When the price of puto decreases, the seller can utilize the ingredients and produce more leche flan, since it would be more profitable for the seller

  • As a result, there is a decline in the production of puto, and the supply curve will shift to the left

Government Policies

  • Tax and subsidies are some of the most common government policies that could affect the production of goods and services

  • The imposition of taxes means additional costs for the producers. Increased production cost hinders production, making the supply curve shift to the left

  • On the other hand, subsidies are a form of support from the government, such as a fertilizer subsidy, that helps farmers to lessen their cost of production. This would help increase their production, making the supply curve shift to the right