5. managerial economics Supply Analysis.pptx

economics

1. Managerial Economics Supply Analysis Prof. Dr. Qais Aslam SAF, UCP, Lahore

2. Stock = Goods with the seller, go-down or the firm ready to be sold Supply = Act of Selling for Profit Motive ( supply is a flow from the seller to the buyer for a price) Supply is the transfer of ownership from the seller to the buyer after price has been paid Quantity supplied ( qs ) is the amount of goods and services that sellers (and producers) are willing and able to sell at a Price and Refers to Willingness and ability of sellers to produce & offer to sell different quantities of goods & services at different Prices during specific periods of the week, day and month etc. Supply is a flow from the seller to the buyer at a certain amount of money (Price)

3. Supply is just not a word Supply is real goods and service that have been produced to be sold. To produce extra unit of supply needs demand of extra unit of energy, raw material and employment of labor as well as investments in money terms and there is time taken for production of these goods and services (supply-chain management and management of production process (factors of production) and management of forward linkages or marketing and sales =) Say's Law of market : Supply creates its own demand (Accelerator): Increase in Supply needs to increase employment of labor, thus increases income levels in the economy, that is used to increase demand for that extra supply of goods and services in the economy ( trickle down effect ) Tricle up effect = knowledge economy = educate the labor force into highly skilled so that they will enhance the profit margins of the corporate sector / entrepreneurs

4. The Supply Function The quantity supplied of any good or service is the amount that sellers are willing or able to sell There are many determinants of quantity supplied, but again Price (P) plays a special role in determining how much quantity would be supplied in the market at any given time When the price of ice cream is high, selling ice cream is profitable, and so the quantity supplied is large Sellers of ice cream do not sell if the price of ice cream is low, business is less profitable, so sellers produce less ice cream At low price, some sellers may even choose to shut down, and their quantity supplied falls to zero This relationship between Price and quantity supplied is called “ Law of Supply ” The supply function of individual firms can be defined for: A very short period ( immediate ) during which output level can not vary because input and output prices do not change . Supply curve is parallel to the horizontal axis A short run during which output level can be varied but plant size cannot change . Input prices are constant, output prices change, supply curve is upward sloping from left to right A long-term period in which all inputs Prices and output prices are variables but economy or firms are producing at full employment levels, supply curve is parallel to vertical axis.

5. ( 3) Long run supply curve is parallel to the vertical axis because firms are producing at full employment levels therefore output can not change (1) Immediate supply curve is parallel to the horizontal axis because the input price do not change and output prices also do not change ( 2) Short run supply curve is upward sloping because input prices do not change but output price can change (vary) Px Qs(x)3 Qs(x)1 Qs(x)2

6. Law of supply Other things remaining the same ( ceteris paribus or assumed to be constant) “When price of a commodity increases, its quantity supplied ( qs ) also expands and when Price of a commodity decreases its quantity supplied ( qs ) also contracts” Qs = a + bP Or There is a Positive relationship between Price and quantity supplied Price is independent variable, quantity supplied and quantity demanded are dependent variables Supply curve is Upward sloping Supply Curve from left to right ( short run period ) Upward sloping supply curve is the graphical representation of the law of supply, which states that price and quantity supplied are directly and proportionately related, ceteris paribus . Or higher the Price of x, higher the profits of firm i , higher the supply of x by firm i , and lower the price of x, lower the profits of firm i , lower the supply of x by firm i . The Price of the good is represented on the vertical axis while the quantity supplied is represented on the horizontal axis

7. Individual & Market Supply curve slopes upward from left to right Price Supply ( Sx ) qs1 P2 P1 qs2

8. Individual vs Market Supply Curves The Market supply is also the sum of all the sellers (suppliers) in the market of a certain commodity (x) The individual supply schedule of any seller (1, 2, …, n) in the market tells us the quantity of ice cream (x) that that particular seller sells in a certain time period (one day) When we sum up all the supply curves of all the sellers of ice cream (x) at a certain price, we derive the Market supply curve of ice cream in that time period (one day) The horizontal summation of individual supply of ice cream (x) at a particular price will give us the market supply curve Change in price will give us upward Market supply curve of ice cream (x) in the ice cream market The Market Supply Curve shows how the total quantity supplied varies as the price of the good varies, all other factors that influences the supply of any commodity remaining constant

9. Supply ( Sx ) Of seller 3 Supply ( Sx ) Of seller 1 Supply ( Sx ) Of seller 2 Px Qs(x)3 Qs(x)1 Qs(x)2 Market supply of (x) as ∑ of all sellers in the Market

10. The quantity supplied in the market depends upon those factors that determine quantity supplied by individual sellers although, Profit is the only motive to supply goods and services in the market Determinants of Supply and Shift of The Supply Curve Input prices (Cost of production ) = Rent + Wage + interest + normal profits. To produce the output of ice cream (x) sellers use various inputs – raw materials, machines, labor, building, energy. The prices of these inputs rise and producing ice cream (x) becomes less profitable and if these prices of input fall, it became more profitable to produce more ice cream (x). higher the costs lower the supply & vice versa. Thus supply is negatively related to input prices (costs) Availability of technology & Technology levels . The technology for turning inputs into output is another determinant of supply. The invention of automatic machines and robotics reduces the amount of labor inputs and therefore reduce the firm’s costs, and advancement in technology raises the supply. better technology, higher the supply & vice versa Expectations of the sellers (producers ) from the market = future profit margins . If the firm expects that price of ice cream (x) to rise in the future, it will put some of its current production into storage and supply less to the market today and vice versa. = higher the expectations for tomorrow , lower the supply today & vice versa Number of Sellers in the Market: Market supply also depend upon the number of sellers in the market. More the sellers, higher is the supply and vice versa Transport costs – greater the transport cost less area the supply will cover and vice versa Storage capacity – less the storage capacity, less the supply & vice versa Government Regulations can restrict or increase supply Change in these above factors (price remaining constant) would shift the supply curve

11. Price Qs S3 S2 S1 Change in other factors induces Supply Curve to Shift . Rightward shift if there is increase in Supply & Left wards shift if there is decrease in supply due to changes in other factors

12. Shift of the supply curve When Price of x is constant, but supply of x increases due to change in any of the other factors like decreasing input costs, or change to better technology, or less transport costs or better and larger storage facilities, or change in government regulations, the supply curve would shift to the right When Price of x is constant, but supply of x decreases due to change in any of the other factors like increasing input costs, or change to old technology, or more transport costs or smaller storage facilities, or change in government regulations, the supply curve would shift to the left

13. Reason for positive relationship between price and Supply When Price increase Profits tend to increase therefore suppliers increase supply because they get incentive to sell and when Prices decrease Profit margins tend to decline therefore the incentive to sell diminishes and suppliers tend to decrease supply Higher the price, higher the profits therefore higher incentive to sell; lower the price, lower the profits, therefore lower incentive to sell (Movement along the supply curve due to change in Price, other factors remaining constant)