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Micro Economics

Notes In one sense, supply is the mirror image of demand. Individuals’ supply of the factors of
production or inputs to market mirrors other individuals’ demand for these factors. For example,
if we want to rest instead of weeding the garden, we hire someone: we demand labour. For a
large number of goods, however, the supply process is more complicated than demand.
Supply is not simply the number of a commodity a shopkeeper has on the shelf, such as ‘10
oranges’ or ‘10 packet of chips’, because supply represents the entire relationship between the
quantity available for sale and all possible prices charged for that good. The specifi c quantity
desired to sell of a good at a given price is known as the quantity supplied. Typically a time period
is also given when describing quantity supplied. For example, when the price of an umbrella is
` 100, the quantity supplied is 500 umbrellas a week.
The supply of produced goods (tangibles) is usually indirect and the supply of non-produced
goods (intangibles) is more direct. Individuals supply their labour in the form of services directly
to the goods market. For example, an independent contractor may repair a washing machine. The
contractor supplies his labour directly.

3.2 Law of Supply

According to the Law of Supply, other things remaining constant, higher the price of a commodity,
higher will be the quantity supplied and vice versa. There is a positive relationship between
supply and price of a commodity.
As in the case of quantity demanded, price is the major determinant of quantity supplied. In
graphical terms supply refers to the entire supply curve because a supply curve tells us how
much of a commodity will be offered for sale at various prices. Quantity supplied refers to a point
on a supply curve. In case, the price of a good rises, individuals and firms can rearrange their

activities in order to supply more of that good to the market, substituting production of that good
for production of other goods.

With the firms, there is another explanation. Assuming firm’s costs are constant, higher price

means higher profits (the difference between a firm’s revenues and its costs). The expectation
of those higher profits leads it to increase output as price rises, which is what the law of supply

states.
Figure 3.1 depicts a supply curve, which is based on law of supply.
Figure 3.1: Supply Curve

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