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.

Behavioural objectives

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

1. Define supply and state the law of supply.
2. Describe a supply schedule and a supply curve.
3. Explain the three types of supply with examples.
4. List and explain the factors that influence the supply of a commodity.
5. Explain abnormal supply and give its causes.

What is supply?

Supply is the quantity of a commodity that sellers are willing and able to offer for sale at a given price in a given period.

• Willing: the seller must wish to sell the commodity at that price.
• Able: the seller must have the goods or the means to produce them.
• Price: every quantity supplied is linked to a stated price.
• Period: supply is measured per day, week, month or year.
• Effective supply: only the amount put on the market at a given price counts, not the whole stock or total production.

What is the law of supply?

The law of supply states that, all other things being equal, the higher the price of a commodity, the greater the quantity supplied, and the lower the price, the smaller the quantity supplied.

• Price rises: producers supply more because the sale brings more profit.
• Price falls: producers supply less because profit falls.
• Direct relationship: price and quantity supplied move in the same direction.
• Assumption: other factors such as cost of production and technology stay constant.
• Position: it is often called the second law of demand and supply.

What is a supply schedule?

A supply schedule is a table showing the quantity of a commodity supplied at different prices.

There are two types of supply schedule: individual and market.

• Individual supply schedule: shows the quantities one seller will supply at different prices.
• Market supply schedule: shows the total quantities all sellers will supply at different prices. It is the sum of the individual schedules.

Example of a supply schedule (illustrative figures)

• Reading the table: as the price rises, both sellers supply more.
• Market column: each figure is Seller A plus Seller B.

What is a supply curve?

A supply curve is a graph that shows the relationship between the price of a commodity and the quantity supplied.

• Source: it is drawn from the figures in the supply schedule.
• Axes: price is on the vertical axis and quantity supplied is on the horizontal axis.
• Slope: it slopes upward from left to right, unlike the demand curve.
• Meaning: the upward slope shows the law of supply.

What are the types of supply?

There are three types of supply: complementary (joint) supply, competitive (substitute) supply and composite supply.

Complementary (joint) supply

• Meaning: two or more commodities are produced and supplied from one source.
• Effect: more supply of one product automatically increases the supply of the others.
• Example: more petrol from crude oil also gives more kerosene and other products.

Competitive (substitute) supply

• Meaning: many commodities are supplied to satisfy the same want.
• Effect: the commodities are alternatives, so sellers compete for buyers.
• Examples: meat and fish, Omo Blue and Elephant Blue detergents, margarine and butter.

Composite supply

• Meaning: one commodity can be used for two or more purposes.
• Effect: the quantity supplied for one use reduces what is left for the other uses.
• Examples: flour used for bread reduces flour for cake. Cassava used for starch reduces cassava for gari.

What factors influence the supply of a commodity?

The supply of a commodity depends mainly on its price, cost of production, technology, season, government policy, expectations, taxation, prices of other goods and number of sellers.

• Price of the commodity: the most important factor. A higher price increases the quantity supplied.
• Cost of production: if the cost falls, producers can supply more at the existing price.
• Technological development: better methods allow large-scale production at lower cost, as with modern farm equipment.
• Season: supply of some goods changes with the weather, such as more umbrellas in the rainy season. It also affects farm produce.
• Government policies: subsidies encourage supply, while import restrictions change the goods available.
• Expectation of future prices: a seller who expects prices to rise may supply less now and sell later at the higher price.
• Taxation: higher taxes raise the cost of production and reduce supply.
• Prices of other commodities: producers may switch to goods whose prices are higher and stop making goods that sell at lower prices.
• Number of sellers: more sellers in the market increase the total supply.

What is the difference between a change in quantity supplied and a change in supply?

A change in quantity supplied is caused only by a change in the price of the commodity itself.

• Expansion of supply: a price rise makes sellers supply more, a movement up along the same curve.
• Contraction of supply: a price fall makes sellers supply less, a movement down along the same curve.

A change in supply is caused by any factor other than the price of the commodity.

• Increase in supply: more is supplied at every price, so the curve shifts to the right.
• Decrease in supply: less is supplied at every price, so the curve shifts to the left.

What is abnormal supply?

Abnormal supply is a supply pattern that does not follow the law of supply.

• Other names: exceptional supply, regressive supply or backward-sloping supply curve.
• Pattern: at a higher price, less quantity is supplied.
• Reverse effect: a fall in price can lead to more being supplied.

What are the causes of abnormal supply?

• Fixed assets: some assets, such as land, cannot be increased even when their prices rise.
• Rising wages: at a high wage rate a worker may take more leisure and work fewer hours.
• Target income: a producer aiming at a fixed income may keep supplying more even when prices fall.
• Monopolistic practices: a monopolist may hold back supply while prices rise, to push prices even 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

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