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Unit 3: Market Supply and Equilibrium

the quantity available for sale and all possible prices charged for that good. The specific quantity Notes
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.

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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Price of X (in

The law of supply also assumes that other things are held constant. Other variables, like price of
inputs used in production, technology, producers’ expectations and number of producers in the
market, might change, causing a shift in supply. This will be discussed in the next section.
A supply schedule is a table which lists the possible prices for a good and service and the
corresponding quantity supplied.
Market supply is the summation of all individual supplies at a given price. The market supply
curve is the horizontal sum of the individual supply curve.

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