Business Economics – I (Micro)

Code: CLNL1014

Dr. Mir Khursheed Alam

PhD Indian Institute of Technology Mandi, Program: BA LLB (H)
(H.P), India
Semester II:
Cohort: B1 and B4
Assistant Professor (Senior Scale) of Economics,
UPES School of Business Year: 2024-25

Office Address: K1103 Classroom: K2002, K2003

Email: [email protected]

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 Business Economics – I (Micro) (Module 3)

Unit III: Theory of Supply and firms’ behaviour 8 lecture hours

Meaning of Supply, Supply Schedule, Supply function,

Law of supply; Determinants of Supply,
Individual Supply and Market Supply;
Movement and shifts in Supply Curve,
Market Equilibrium;
Effects of a shift in Supply or Demand curves and its impacts on Price & Quantity
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Supply
• Supply refers to the quantity of goods that is made available in the market for
the purpose of purchase by the consumers.
• Supply is the amount of a product or service that a producer is willing and able
to sell to buyers, over a period of time.
• Supply is a flow concept.

Supply function
Determinants of supply

• Price of the good.

• Prices of related goods
• Prices of factors of production
• State of technology
• Government policy
• Nature of competition
• Future expectations
• Other factors
 Law of supply

Law of Supply states that ‘Other

things being constant,

the rise in the price of the

commodity will increase the supply
of the commodity, and

the fall in the price of the

commodity leads to decrease in the
supply of the commodity.

In other words, there is a direct

relationship between the Price of
the commodity and its quantity
supplied.’
Supply curve
Relationship between the quantity of a good that
producers are willing to sell and the price of the
good.

The supply curve shows the quantity of a good that

producers are willing to sell at a given price, holding
constant any other factors that might affect the
quantity supplied.

The supply curve is upward sloping: The higher the

price, the more firms are able and willing to produce
and sell.

If production costs fall, (due to a decrease in firms’

tax), firms can produce and sell more quantity of
goods.

the same quantity at a lower price or a larger

quantity at the same price. The supply curve then
shifts to the right (from S to S’).
 Market Supply Curve
Market Supply as the horizontal summation of Individual Supplies
Expansion and contraction in supply

Extension of supply: When the price of a

commodity increases (say from P to P1), its
quantity supplied also increases (from Q to Q1)

Contraction of supply. When the price of a

commodity decreases (from P to P2), the quantity
supplied of it also decreases (from Q to Q2)

It leads to the law of supply.

All the changes in quantity supplied are resulting

from the change in price factor, is called the
movement of extension and contraction of supply,
keeping all other factors affecting the quantity
supplied of a commodity constant.

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CHANGES IN THE SUPPLY CURVE

Movement along the

Supply curve

When the price of a

product changes it will
result in a movement
along either a demand or
supply curve.
 Shift in supply curve

Primary factors that cause a

change in supply, which
necessitates the shifting of
the supply curve:

Government policies
Number of sellers
Expectations of sellers
Price of raw materials
Technology
Other prices
Shift in supply curve

When a non-price
determinant of
demand or supply
changes (assuming
price is constant) it
will cause a shift in
the position of the
demand or supply
curve.
Factors responsible for shift in supply curve
THE MARKET MECHANISM AND MARKET EQUILIBRIUM

Equilibrium a situation in
which the market price has
reached the level at which
quantity supplied equals
quantity demanded.

Equilibrium price the

price that balances
quantity supplied and
quantity demanded

Equilibrium quantity the

quantity supplied and the
quantity demanded at the
equilibrium price

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WHEN MARKETS ARE NOT IN EQUILIBRIUM

Surplus a situation in which quantity Shortage a situation in which

supplied is greater than quantity quantity demanded is greater
demanded than quantity supplied 15
WHEN MARKETS ARE NOT IN EQUILIBRIUM

Surplus a
situation in
which
quantity
supplied is
greater than
quantity
demanded

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Shortage a situation
in which quantity
demanded is greater
than quantity
supplied

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Effects of change of market conditions

Shifts in demand curve

Shifts in Supply curve
Rightward shift in the demand
The supply curve has shifted from S to S’,
curve resulting from, say, an
perhaps as a result of a decrease in the price of
increase in income. A new price
raw materials. As a result, the market price
and quantity result after demand
drops (from P1 to P3), and the total quantity
comes into equilibrium with
produced increases (from Q1 to Q3) 2
supply.
 Shifts in demand and supply curves

In most markets, both the demand and supply curves

shift from time to time.

Consumers’ disposable incomes change as the

economy grows (or contracts, during economic
recessions).

The demands for some goods shift with the seasons

(e.g., fuels, bathing suits, umbrellas), with changes in
the prices of related goods (an increase in oil prices
increases the demand for natural gas), or simply with
changing tastes.

Similarly, wage rates, capital costs, and the

prices of raw materials also change from time to
time, and these changes shift the supply curve.
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Effects of government intervention

Why must the Government

intervene?
• Market Failures
• Negative externalities

Can the government solve these

market failures?

• Solve under the provision of goods

• To increase the size of the pie and
attain equity in the distribution of
the pie.

 Price ceiling a legal maximum on the price at which a good can be sold
 Price floor a legal minimum on the price at which a good can be sold 2
PRICE CONTROLS

Rent controls may have a number of

positive effects:

Help poor families pay for their housing,

Soften the effects of economic shocks,

preserve balanced neighborhoods,

Preventing them from becoming mostly rich

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 WAS FREE-MARKET EFFICIENT DURING COVID-19

Free markets are very good at creating

surplus/shortage

 Market Failures: Sometimes free markets fail,

deliver an which is socially inefficient outcome, and
produce unacceptable results. Free markets are very
good at creating surplus/shortage
 Recent economic crisis, price of OXYGEN
CYLINDERS in COVID-19), Accommodation
shortage
 Consequences: Free-market economies may have
outcomes that seem unfair (inequitable), because
free markets may yield.
 Many poor people who lack basic necessities
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EFFECTS OF GOVERNMENT INTERVENTION—PRICE
CONTROLS

▪ Forms of government intervention:

▪ Price controls
▪ Nonprice rationing
▪ Taxes and subsidies applied to goods and services,
▪ Income and wealth redistribution with taxes and subsidies
▪ Other kinds of government Quotas

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FIND EQUILIBRIUM PRICE AND EQUILIBRIUM QUANTITY

Hint Quantity Supply (Qs) = - 5 + 3P

At the equilibrium price, Quantity Demand (Qd) = 10 - 2P
Q. Demand = Q. Supply
Find the equilibrium price by using Qd = Qs

Find the value for Qs and Qd

Quantity Supply (Qs) = - 4 + 8P

Quantity Demand (Qd) = 26 - 2P

Find the equilibrium price by using Qd = Qs

Find the value for Qs and Qd

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FINDING EQUILIBRIUM IN MARRIAGE MARKET
A marriage market can be modeled as a two-sided market where men and women
seek partners, and the "price" is a dowry or bride price—i.e., the amount of money
a potential husband/wife must give to their spouse. The equilibrium in this market
is the price at which the number of men willing to marry equals the number of
women willing to marry.’’’

Assumptions:
•There are 100 men and 100 women in the marriage market.
•Each woman demands a minimum price (dowry/bride price) to agree to marriage.
•Each man is willing to pay up to a certain price to get married.

We define the price as the amount of money a potential husband/wife must give to
their spouse to get married (e.g., dowry or bride price). Our goal is to determine the
equilibrium price and the number of unmarried men and women in the market.

Market equilibrium occurs where the number of men willing to pay matches the 25

number of women willing to marry.

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FINDING EQUILIBRIUM IN RELATED MARKETS FOR BOOKS AND PENS

Given the following set of simultaneous equations for two related markets, Books (B)
and Pens (P), find the equilibrium conditions for each market, using the substitution
method.

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NUMERICALS
ON MARKET
EQUILIBRIUM

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