Economics · Lesson 4

Supply: law, determinants, shifts & elasticity

JAMBWAECNECO

What the syllabus asks

JAMB: Theory of supply: meaning and determinants, schedules and curves, change in quantity supplied vs change in supply; types of supply; elasticity of supply: types, measurement, determinants and importance; uses of elasticity (incidence of taxation)

WAEC: Supply: meaning, law of supply, supply schedule and curve, individual and market supply, determinants, change in quantity supplied vs change in supply, types of supply (joint, composite, competitive), exceptions; elasticity of supply: meaning, types, measurement, determinants and importance

NECO: Supply: meaning, law of supply, supply schedule and curve, individual and market supply, determinants, change in quantity supplied vs change in supply, types of supply (joint, composite, competitive), exceptions; elasticity of supply: meaning, types, measurement, determinants and importance

What you will learn

Define supply and distinguish it from stock.
State and explain the law of supply with a schedule and a curve.
Derive market supply from individual supply schedules.
Distinguish between a change in quantity supplied and a change in supply.
Explain the determinants, types and exceptions of supply.
Calculate and interpret price elasticity of supply and explain its determinants and importance, including tax incidence.

Key points

Supply: quantity producers are willing and able to offer for sale at various prices in a given period; stock is the total in existence.
Law of supply: price and quantity supplied are directly related, ceteris paribus.
Market supply = horizontal sum of individual supplies.
Determinants: own price, costs, technology, prices of other goods, weather, taxes/subsidies, number of firms, expectations, security.
Own price: movement along (extension/contraction); other factors: shift (increase right, decrease left).
Types: joint, competitive, composite.
Exceptions: labour at high wages, hoarding, target incomes, fixed supply, short-run farm output, perishables.
PES = %ΔQs ÷ %ΔP, positive; 0 vertical, ∞ horizontal, 1 through origin.
Determinants of PES: time, gestation, spare capacity, storage, factor mobility.
Tax incidence: the more inelastic side bears more of the tax.

Start here: Meaning of supply

In Topic ec3 we looked at the buyers. Now we turn to the sellers: the farmer in Benue with yams, the bakery in Aba, the sachet water factory in Ibadan. How much do they bring to market, and why?

Supply is the quantity of a good or service that producers are willing and able to offer for sale at various prices, at a given time, other things being equal.

As with demand, the definition has key parts:

Willing and able: a farmer who would like to sell 100 bags of rice but has harvested only 40 cannot supply 100.
Offered for sale: goods kept for the producer’s own use are not supply.
At various prices: supply is a relationship between price and quantity.
Per period: per day, week, month or season.

Supply versus stock

Stock is the total quantity of a good in existence at a moment, for example all the bags of maize in a warehouse. Supply is the part of that stock offered for sale at a particular price. If the price is low, the trader may hold back much of the stock, hoping for a better price later; if the price is high, she releases more. So supply can be less than stock, but it can never be greater than stock plus new production in the period.

Worked example 4.1

A trader in Kano has 500 bags of onions in her store. At the current price she sells 200 bags this week. What is her stock and what is her supply?

Stock = all bags in existence in her store = 500.
Supply = bags offered for sale at that price this week = 200.

Stock 500 bags; supply 200 bags per week

⚠️ Common mistake: using "supply" and "stock" as if they mean the same thing. Stock is a total at a point in time; supply is what is offered at a price over a period.

Try it yourself. Can supply ever be greater than stock (assuming no new production)?

Show solution

No. Supply is drawn from stock, so it can at most equal it.

Continue this lesson in the free app →

Practice questions

1. Supply is the quantity of a good that producers are

willing and able to offer for sale at various prices in a given period
holding in stock
producing for their own use
importing

Show answer

A: willing and able to offer for sale at various prices in a given period
Supply differs from stock, the total in existence.

2. The law of supply states that, other things being equal,

less is supplied at higher prices
price does not affect supply
supply is always fixed
more is supplied at higher prices

Show answer

D: more is supplied at higher prices
Price and quantity supplied are directly related.

3. An improvement in production technology will

cause a movement along the supply curve
reduce supply
shift the supply curve to the right
shift the supply curve to the left

Show answer

C: shift the supply curve to the right
Lower costs raise supply at every price.

4. A tax on producers usually

has no effect on supply
shifts the supply curve to the left
shifts the supply curve to the right
shifts the demand curve to the right

Show answer

B: shifts the supply curve to the left
A tax raises costs.

5. Beef and hides are an example of

joint supply
competitive supply
composite supply
derived supply

Show answer

A: joint supply
Producing one automatically produces the other.

Key words

Supply: Quantity producers are willing and able to offer for sale at various prices in a given period.
Stock: Total quantity of a good in existence at a time; only part of it may be offered (supplied).
Supply schedule: A table showing quantities supplied at various prices.
Supply curve: Graph of the supply schedule; normally slopes upward from left to right.
Market supply: Sum of the supplies of all firms at each price.
Extension of supply: Rise in quantity supplied caused by a rise in own price.
Contraction of supply: Fall in quantity supplied caused by a fall in own price.
Increase in supply: Rightward shift of the supply curve; more offered at every price.
Decrease in supply: Leftward shift; less offered at every price.
Joint supply: Two or more goods produced together from one process, e.g. beef and hides.
Competitive supply: Factors used to produce one good cannot produce the other at the same time, e.g. maize or cassava on one plot.
Composite supply: A want satisfied by several sources of supply, e.g. energy from fuelwood, kerosene and gas.

Learn Supply: law, determinants, shifts & elasticity step by step, free.
The Cara's Tips app teaches every topic from the very basics, with quick checks, worked examples and exam practice. It works offline.
Open this lesson in the free app Download for Android