Concept of Demand and Supply II – SS1 Economics Lesson Note (First Term)

Supply is the quantity of goods and services that sellers are willing and able to offer for sale at a particular price in a particular period. Only the amount put on the market at a given price counts, not the entire stock or total production. This is called effective supply.

Behavioural objectives

By the end of the lesson, students should be able to:

• define supply and state the law of supply;
• describe a supply schedule and a supply curve;
• explain the three types of supply with examples;
• list and explain the factors that influence the supply of a commodity;
• explain abnormal supply and give its causes.

What is supply?

Supply may be defined as the quantity of goods and services which sellers are willing and able to offer for sale at a particular price and in a particular period.

Supply does not mean the entire stock of a commodity in existence or the total quantity produced. It means only the amount that is put into the market or offered for sale at a given price in a particular period. This is referred to as effective supply.

What is the law of supply?

The law of supply states that, all things being equal, the higher the price, the higher the quantity of a commodity that will be supplied, and the lower the price, the lower the quantity that will be supplied. This law is often regarded as the second law of demand and supply.

When the price of a commodity is high in the market, producers will supply more of it, and vice versa.

What is a supply schedule?

A supply schedule is a table of values showing the relationship between the price of a commodity and the quantity supplied. It is divided into two parts:

1. Individual supply schedule
2. Market supply schedule

What is a supply curve?

The supply curve is the graphical representation of the supply schedule. It is derived from the schedule and shows the relationship between the price of a commodity and the quantity supplied by the producer.

Unlike the demand curve, the supply curve slopes upward from left to right. Both the supply curve and the supply schedule illustrate the law of supply: the higher the price of a commodity, the higher the quantity supplied, and vice versa.

What are the types of supply?

1. Complementary (joint) supply: This occurs when two or more commodities are produced and supplied from one source. An increase in the production and supply of one automatically increases the supply of the others from the same source, e.g. an increase in the supply of petrol from crude oil can also increase the supply of kerosene and other products from crude oil.
2. Competitive (substitute) supply: This occurs when many commodities are supplied to satisfy a particular want. It is the supply of two or more commodities that serve as substitutes or alternatives to one another, e.g. meat and fish, Omo Blue detergent and Elephant Blue detergent, margarine and butter.
3. Composite supply: This occurs when a commodity can serve two or more purposes. The supply of the commodity for one purpose greatly affects its supply for another purpose, e.g. flour used for one purpose affects the flour available for cake, and cassava used for starch affects the production of gari.

What factors influence the supply of a commodity?

1. Price of the commodity: This is the most important factor influencing supply. The higher the price of the commodity, the higher the quantity supplied, and vice versa.
2. Cost of production: If the cost of producing a commodity falls, more of it can be supplied at the existing price. A producer can produce more with the existing raw materials, hence an increase in supply.
3. Technological development: An improvement in technology improves the methods of production. This encourages large-scale production at lower cost, which increases supply, e.g. the use of modern farming techniques and equipment.
4. Season: The prevailing season influences the supply of a particular commodity, e.g. more umbrellas are supplied during the rainy season. This also applies to agricultural products.
5. Government policies: Policies such as subsidies and restrictions on importation affect the supply of goods in both the long and short run.
6. Expectation of future change in prices: Suppliers’ expectations about future prices may affect supply, e.g. if a supplier expects prices to rise in future, he or she will reduce the quantity supplied now, to sell later at higher prices.
7. Taxation: Increased taxation on goods raises the producer’s cost of production and so affects the supply of the product.
8. Prices of other commodities: When the prices of some commodities are high, some producers may switch to producing them and stop producing the commodities that sell at lower prices.

What is abnormal supply, an exception to the law of supply?

Exceptional or abnormal supply is a supply pattern that does not follow the law of supply. It gives the reverse of the basic law, which states that the higher the price, the higher the quantity supplied, and vice versa.

Abnormal supply is also called a regressive or backward-sloping supply curve. It shows that at a higher price, less quantity is supplied. In this situation, a fall in the price of a commodity leads to an expansion of its supply.

Causes of abnormal supply

1. Existence of some fixed assets whose prices increase without a corresponding increase in their size, e.g. land.
2. Rising wages of labour, where a worker tends to increase his leisure time and reduce his productive working hours at a high wage rate.
3. A producer with a particular target income may go on supplying the market with his commodities even when prices fall.
4. Monopolistic practices, where a producer may hold back supply even when prices are rising, just to push prices still higher.

Evaluation

1. Define supply and explain what is meant by effective supply.
2. State the law of supply.
3. Explain the three types of supply, giving one example of each.
4. List five factors that influence the supply of a commodity.
5. What is abnormal supply? Give two of its causes.

Assignment

1. Explain any three factors that influence the supply of a commodity.
2. Explain why the supply curve slopes upward from left to right, and state one situation in which the supply curve does not follow this pattern.