Study Notes on the Law of Supply

DEPARTMENT OF ECONOMICS: THE LAW OF SUPPLY

Instructor

• Dr. Grace Onubedo, PhD Economics

Learning Objectives

• At the end of this lesson, students should be able to:

  • Define the law of supply and its fundamental principle.

  • Explain the positive relationship between price and quantity supplied.

  • Describe the factors influencing supply and how they interact with the law of supply.

  • Apply the law of supply to analyze and predict the effects of price changes on quantity supplied.

Introduction

• Goal of the lesson:

  • To explore what determines firms' willingness to produce and distribute the goods and services that people want.

  • To understand how firms decide how to produce their goods and services.

Definitions and Key Concepts

Supply

• Supply refers to the quantity of a good or service that producers are willing and able to sell at a certain price.

Determinants of Supply

• The price of the good or service

• Cost of production:

  • Depends on:

  • The price of required inputs (labor, capital, and land)

  • Technologies that can be utilized to produce the product

• Price of related products

Supply Schedules and Supply Curves

Definitions

• Quantity supplied: The amount of a particular product that firms are willing and able to offer for sale at a particular price during a given time period.

• Supply Schedule: Shows how much of a product firms will sell at alternative prices.

• Supply Curve: A graphical representation of a product firms will sell at alternative prices.

Activity 1

• 
  

• Supply Schedule for a Maize Farmer (Henry):
  

  Price ($)	Quantity (bags)
  1.50	0
  1.75	1000
  2	2000
  4	3000
  6	3000
  Students are required to plot the supply curve based on the schedule provided.
  Individual Supply Vs Market Supply

  Definitions

  • Individual supply: The amount of a commodity that an individual producer is willing and able to sell at a specific price during a specified period.

  • Market supply: The total quantity supplied each period by all producers of a single commodity.

  • The market supply curve illustrates the relationship between price and the total quantity supplied for a given period.

  Graphical Representation

  • 
    

  • In an open farmers market with three individual farmers (A, B, and C) supplying maize, the market schedule is as follows:
    

    Price ($)	Quantity
    10	600
    8	550
    6	400
    4	300
    2	100
    Students will also plot the market supply curve based on this data.
    Law of Supply

    • Supply curves are upward sloping, depicting a positive relationship between price and quantity supplied:

      • As price rises, quantity supplied increases.

      • As price falls, quantity supplied decreases.

    • Law of Supply:

      • States that, all other factors being equal, as the price of a good or service increases, the quantity of goods or services that suppliers offer will increase, and vice versa.

    Assumptions of the Law of Supply

    • No change in income of buyers and sellers.

    • The technology utilized remains constant.

    • The costs of all factors of production do not change over time.

    • The tastes and preferences of buyers remain unchanged.

    • Natural factors remain stable.

    • Expectations of producers and government policy do not change over time.

    • The prices of other goods remain constant.

    • The producer is rational.

    Reasons Why the Supply Curve Slopes Upward

    1. Profit Maximization:

       • The main motivation for producers is to achieve maximum profit.

       • Higher prices lead to increased revenues and profits.

       • Fixed per unit costs enable greater profits at higher prices, incentivizing increased production and supply.

    2. Law of Diminishing Returns:

       • Inputs result in decreased marginal output beyond a certain point of production capacity.

       • As production increases, costs rise, necessitating higher prices for justifying further production.

    3. Production Cost:

       • Increased prices provide an incentive to supply more due to higher profit potential.

       • Producing additional units often incurs higher costs, requiring higher prices to maintain profitability.

    4. Opportunity Cost:

       • Suppliers must account for opportunity costs when producing specific goods or services.

       • When prices of certain goods rise, suppliers might divert resources from other goods to maximize profits, increasing supply and yielding an upward-sloping curve.

    Exceptions to the Law of Supply

    1. Perishable Goods:

       • Suppliers may reduce prices on perishable items to avoid losses.

    2. Closure of Business:

       • Sellers may sell goods at lower prices to clear stock when a business is closing.

    3. Rare Goods:

       • The supply of rare items (like artwork or precious materials) is limited and cannot be increased regardless of demand or prices.

    Summary

    • Supply: The quantity of a good or service producers are willing to sell at a certain price.

    • Quantity Supplied: Represents the amount offered for sale at specific prices during a given time period.

    • Supply Schedule: Outlines how much of a product will be sold across different prices; Supply Curve: Graphical representation of this data.

    • Law of Supply: As price increases, quantity offered increases, and vice versa, holding other factors constant.

    Further Reading

    • Principles of Economics by N. Gregory Mankiw

    • Microeconomics by Robert S. Pindyck and Daniel L. Rubinfeld

    • Intermediate Microeconomics: A Modern Approach by Hal R. Varian

    • Economics by Paul Krugman and Robin Wells

    Conclusion

    • Understanding the law of supply is crucial for analyzing economic behavior in the market.

    • It informs producers how to adjust their supply in response to price changes, thereby influencing overall market dynamics.

    Thank You!