Supply

Quantity Supplied: The quantity supplied of any good or service is the amount that sellers
are willing and able to sell.

Law of Supply: Law of supply states that when other things remaining the same, if price of
a commodity rises, quantity supply of that commodity also rises and if price of a commodity
falls the quantity supply for that commodity also goes down.

Determinants of Supply: Here, others things that should remain same are the determinants
of supply like (1) technology, (2) number of sellers, (3) prices of relevant resources, (4)
prices of related goods, (5) expectations of future price, (6) taxes and subsidies, (7)
government restrictions etc.

Supply Curve: Supply curve is the graphical representation of the law of supply which shows the
positive relationships between price and quantity supplied of a commodity.

Fig. 4: Supply Curve

From Fig. 4 illustrates the supply curve where we observe that when price is P, quantity
supplied is Q1, but when price falls to P1, quantity supplied also declines to Q.
Market supply curve: We can derive the market supply curve by summing the individual firm’s
supply curve.

Fig. 5: Derivation of Market supply curve

When price of a book is 20TK, Robert supplies 3 units of books and Gregory supplies 4 unit

books so that total market supply becomes 7 units when price is 20TK.

Change in quantity supplied versus change in supply:

Fig. 6: Change in quantity supply versus change in supply

Change in quantity supply means movement along the supply curve. If only price change
and all other things remain same then quantity supply changes along the supply curve. And
if any other determinants of supply (technology, number of sellers, prices of relevant
resources, prices of related goods, expectations of future price, taxes and subsidies,
government restrictions) changes and price remain same then supply curve shifts which is
called change in supply or shift in supply.

Equilibrium in the Market:

Equilibrium price is determined when both demand and supply intersect together.

Fig. 7: Equilibrium in the market

This is the market clearing price. At this price, buyers buy their goods and sellers sell their.
If price is higher than the equilibrium price, then supply exceeds demand so that there should
be excess supply in the market. This excess supply push the price goes down until
equilibrium price is restored. If price is lower than the equilibrium price, then demand
exceeds the supply and excess demand in the market arise. This excess demand pull the price
goes up until equilibrium price is restored. At equilibrium price, there should the no excess
demand and excess supply, and market will clear.

Summing up factors that change supply

The graph below summarizes factors that change the supply of goods and services. Notice
that a change in the price of the product itself is not among the factors that shift the supply
curve. Although a change in price of a good or service typically causes a change in quantity
supplied or a movement along the supply curve for that specific good or service, it does not
cause the supply curve itself to shift.

Fig-8: Factors that shift supply curves

a) A list of factors that can cause an increase in supply from S 0 to S1 (S0 refers initial supply
curve and S1 refers new supply curve).

(b) The same factors, if their direction is reversed, can cause a decrease in supply from S 0 to S1.

Four-Step Process

There is a four-step process that allows us to predict how an event will affect the equilibrium
price and quantity using the supply and demand framework.

• Step one: draw a market model (a supply curve and a demand curve)
representing the situation before the economic event took place.
 • Step two: determine whether the economic event being analyzed affects
demand or supply.

• Step three: decide whether the effect on demand or supply causes the curve
to increase (shift to the right) or decrease (shift to the left) and to sketch the new
demand or supply curve on the diagram.

• Step four: identify the new equilibrium price and quantity and then compare
the original equilibrium price and quantity to the new equilibrium price and quantity.

Changes in equilibrium price and quantity: the four-step process

Let's start thinking about changes in equilibrium price and quantity by imagining a single
event has happened. It might be an event that affects demand—like a change in income,
population, tastes, prices of substitutes or complements, or expectations about future prices.
Or, it might be an event that affects supply—like a change in natural conditions, input prices,
technology, or government policies that affect production.

How do we know how an economic event will affect equilibrium price and quantity? Luckily,
there's a four-step process that can help us figure it out!
Step 1. Draw a demand and supply model representing the situation before the economic event
took place.

Establishing this model requires four standard pieces of information:

• A downward sloping demand curve

• An upward sloping supply curve

• Correctly labeled axes: a vertical axis labeled price and a horizontal

• An initial equilibrium price and quantity. It is a good practice to

Step 2. Decide whether the economic event being analyzed affects demand or supply.
In other words, does the event refer to something in the list of demand factors or supply factors?

Step 3. Decide whether the effect on demand or supply causes the curve to shift to the right or
to the left, and sketch the new demand or supply curve on the diagram.

You can think about it this way: Does the event change the amount consumers want to buy or the
amount producers want to sell?

Step 4. Identify the new equilibrium and then compare the original equilibrium price and
quantity to the new equilibrium price and quantity.

The best way to get at this process is to try it out a couple of times! Let’s first consider an
example that involves a shift in supply, then we'll move on to one that involves a shift in
demand. Finally, we'll consider an example where both supply and demand shift.

Shift in Supply: Policy for Ilish fishing

Suppose the Government of Bangladesh has imposed a 22-day (October 01 to 23) ban on
catching, selling and transporting Ilish in a 7,000-km breeding ground to ensure the safe
spawning of this popular fish during its peak breeding period. What will be the impact of this
decision after this time period in the market for Ilish.

We can analyze the impact of this policy as follows:

In this example, our demand and supply model will illustrate the market for Ilish in the year
before the policy was taken. The initial demand curve was D1 and the supply curve S1. The
initial equilibrium price was P1 and quantity was Q1.

Step 2. Decide whether the economic event being analyzed affects demand or supply.
As the Government of Bangladesh has imposed a 22-day (October 01 to 23) ban on catching,
selling and transporting Ilish in a 7,000-km breeding ground to ensure the safe spawning of
this popular fish during its peak breeding period, this will affect the supply of Ilish after this
22-day ban, so the supply curve will shift.

Step 3. Decide whether the effect on demand or supply causes the curve to shift to the right or
to the left, and sketch the new demand or supply curve on the diagram.

We need to determine if the effect on supply in our example was an increase or a decrease.
This policy of Bangladesh government will increase the supply of Ilish after the end of ban,
therefore the supply curve will shift to the right from S 1 to S2.

Step 4. Identify the new equilibrium and then compare the original equilibrium price and
quantity to the new equilibrium price and quantity.
At the new equilibrium where the new supply curve S 2 intersect the demand curve D1, new
equilibrium is established. At this new equilibrium price decreases from P 1 to P2 and quantity
increases from Q1 to Q2.

Policy Effect: Due to this policy of Bangladesh government, supply of Ilish will increase and
people can purchase more Ilish at a lower price than before.