CHANGES IN QUANTITY SUPPLIED VS CHANGE IN SUPPLY

Change in the own price of a commodity on one hand and changes in any of the other supply factors such as prices of related goods, cost of production, technology, Government policy, etc., have two different effects on the supply of a commodity.

Changes in Quantity Supplied (movement along supply curve)
The change in quantity supplied be it increase or decrease is as a result of the retail price alone. That is, price is a major factor here for the changes in quantity supplied. It is also referred to as movement along supply curve. 
There are two types of changes in quantity supplied: 

• an increase in quantity supplied (upward movement along the same supply curve) 
• and a decrease in quantity supplied (downward movement along the same supply curve)

 Increase in Quantity Supplied  
It is caused when the price of a commodity increases. It is shown as an upward movement along the same demand curve from left to right.

From the graph above there is a movement along the supply curve from A to B indicating an increase in quantity supplied as price increases. At point A, when the price was N4000 quantity supplied was 30 bags. But when the price increased to N5,000, quantity supplied increased to 40 bags.

Decrease in Quantity Supplied
It is caused when the price of a commodity decreases. It is shown as a downward movement along the demand curve from right to left.

 
 
  From the graph above there is a movement (downward) along the demand curve from point C to point D indicating a decrease in quantity supplied as price decrease. At point C when price was N6,000, quantity supplied was 60 bags. But when price decreased to N5000, quantity supplied decreased to 40 bags.


Change in Supply (shift in supply Curve)
Change in supply be it increase or decrease is as a result of other factors affecting supply (prices of related goods, cost of production, technology, Government policy), where price is held constant. It is also referred to as a shift in the demand curve

there are two types of Change in supply:

• Increase in supply (rightward shift in supply curve)
• Decrease in supply (Leftward Shift  in supply curve)

Increase in supply  (rightward shift in supply curve)   
An increase in supply is caused where more quantity of commodities are supplied as a result of change in other factors affecting demand where price is held constant.

From the graph above there is an increase in supply from 40 bags to 50 bags, but the price still remained N5500. This change is as a result of change in other factors affecting supply. It is a rightward shift in the supply curve from S0 to S1.




Decrease in supply (Leftward shift in supply Curve) 
A decrease in supply is caused when less quantity of commodities are bought as a result of changes in other factors affecting demand where price is held constant.

From the graph above there is a decrease in the supply  from 60 bags to 50 bags, but the price still remained at N6,000. This change is as a result of changes in other factors affecting supply. it is a leftward shift in the supply curve from S0 to S2.

Note:  A change in quantity supplied is caused by change in price, while a change in supply is caused by changed in other factors affecting supply. 

SUPPLY

What is supply?
Supply is the quantity of goods and services which a producer is willing and able to offer for sale at a particular price over a given period of time where all other supply  factors are held constant.

Law of Supply
It states that ceteris paribus, there is a direct relationship  between price and quantity supplied
Ceteris paribus meaning all other things (other factors affecting supply) held constant.
Direct meaning as one variable is going up, the other variable is going up (price and quantity demanded) and as one is going down the other variable is going down. They move in the same pattern.  In other words, the law states that all other factors affecting demand held constant, the higher the price, the lower the quantity demanded and the lower the price, the higher the quantity demanded.
No producer will want will want to supply a commodity when the prices are low and cost price is constant because revenue and profit will be little. But the moment price is increased with cost price remaining constant, more commodities will offered for sale because higher profit and revenue will be earned. 

Representative Of Supply 
The supply for a commodity may be represented as a schedule, a curve or an equation.

Supply Schedule
It is a tabular representation that shows the relationship between price and quantity supplied

                                             Supply schedule for bread 

From the schedule above, we can see that as the price of Bread in bags are increasing the quantity supplied is increasing and if the price is decreasing from N7,000 to N1,000 the quantity supplied is decreasing from 60bags to 0 bag

Supply Curve
It is a graphical illustration that shows the relationship between price and quantity supplied or that shows the supply schedule

                                                          Supply curve For Bread   

 The supply curve from the above graph is an upward slope from left to right (positive slope) indicating that are price is increasing more quantity is supplied. Or downward slope from right to left indicating that as price is reducing less quantity is supplied. 

                                                 The Demand Function/Equation

The supply function or equation is a mathematical expression showing a relationship between the quantity supplied of a commodity and the factors that affects supply (price, price of related commodity, cost of production, technology) . If all the other supply factors  are held constant and allow quantity supplied to depend only on the price of the commodity then we have:

Qs = f (P)

Where Qs is the quantity supplied and P, the market price

Illustration 

Suppose the supply function for bread given as:

Qs = – 10 + 0.01P

Where P is the price and Qs, the quantity supplied. Find the quantity that will be supplied when the market price of bread is :

(a) N1,000 (b) N1,500

Solution:

From the supply function:

Q = - 10 + 0.01P

(a) If price is N1,000, the quantity supplied will be:

Qs = - 10 + 0.01(1,000) = -10 + 10 = 0

i.e. Suppliers of Amala will not supply the product if the market price is N1,000

b) If price is N1,500, the quantity supplied will be:

Qs = -10 + 0.01 (1,500) = -10 + 15 = 5.

i.e. Suppliers of Bread will supply 5 bags if the market price is N1,500

Factors affecting of Supply

They are the basis upon which quantity supplied are based. Any changes in any of these factors will have a little or substantial effect on quantity supplied, they are:

1. Price: For most commodities, when the price falls, less quantity is supplied while when the price rises, more quantity is supplied when all other supply factors remain constant.

2. Prices of Inputs (cost of production): These are the prices firms pay to obtain factors of production or inputs. They are the cost incurred in making the commodities. Firms pay wages and salaries for hiring labour, rent for the use of land and interest for capital. Increase in cost of production will reduce the quantity supply, because when cost price is increase and selling price remain constant will reduce profit converse is the same when cost price is reduced. 

3.Technology: When a firm uses the best technology available, it can produce a unit of a commodity at the lowest possible cost (economic efficiency). An advancement or improvement in technology is the development of new means of producing a good using a smaller quantity of inputs than was previously possible (technical efficiency). Technological innovation also results in the development of new products that are less costly to produce than the products they replace. Thus, technological change lowers  production costs, which in turn leads to increase in profits and, therefore, increases 

supply.

4. Prices of other commodities:

 (i) Competitive supply products: Because firms have the objective of maximizing  profits, rising prices for other products could cause firms to switch to the production of these products. For example, if the price of coke increase, and that of Pepsi remains constant, producer will have to shift their resources towards the production of coke because coke will yield more profit as compared to the production and supply of Pepsi. 

(ii) Joint-supply products: These are products that are always produced together. One is seen as the by-products of the other. Examples are beef and hide. An increase in the price of say beef, which increase the quantity of beef supplied to the market, will automatically increase the supply of hides, from which leather products are made. Both commodities will yield the production of leather. 

5. Government Fiscal Policy (Taxes and Subsidies): Taxes increase cost of a product which in turn reduces the supply of a product on the other hand, Subsidies reduces the cost price of a product which in turn increases it's supply

6. Weather and other Natural Phenomena: Changes in weather affect the supply of certain commodities especially agricultural products. A favourable weather condition such as good rainfall will increase the supply of agricultural products whiles an unfavourable weather such as drought will cause a decrease in the supply of agricultural products. Other natural phenomena such as, floods, bush fire, pests and so on also affect the supply of agricultural products. 

Types of supply:

1. Joint/complementary Supply: Goods are said to be joint supplied goods when the supply of one product is in the association on the supply of the other product.  it refers to the goods produced or supplied jointly/together e.g., cotton and seed; mutton and wool. In meaning supplied products one is the main product and the other is the by-product of its subsidiary. By-product is mostly the automatic outcome when the main product is produced. e.g when sheep is slaughtered, cotton is gotten also when goat is slaughtered, leather is gotten. 

2. Composite Supply: In this, the supply of a commodity is made from various sources and is called the composite supply. When there are different sources of supply of a commodity or services,

we say that its supply is composed of all these resources.

We normally get light from electricity, gas, kerosene and

candles. All these resources go to make the supply of light.

Thus, the way of supplying the light is called composite

supply.

3. Competitive Supply: it involves the supply of goods/services which can most easily be produced with the resources at the firm`s disposal.

CHANGE IN QUANTITY DEMANDED VS CHANGE IN DEMAND

Change in the own price of a commodity on one hand and changes in any of the other demand factors such as prices of related goods, consumers’ income tastes/preferences, expectations of future prices and incomes, consumer population, etc., have two different effects on the demand for a commodity.

Changes in Quantity Demanded (movement along demand curve)
The change in quantity demanded be it increase or decrease is as a result of price alone. That is, price is a major factor here for the changes in quantity demanded. It is also referred to as movement along demand curve. 
There are two types of changes in quantity demanded: 

• an increase in quantity demanded (downward movement along the same demand curve) 
• and a decrease in quantity demanded (upward movement along the same demand curve)

 Increase in Quantity Demanded 
 It is caused when the price of a commodity reduces. It is shown as a downward movement along the same demand curve from left to right

  From the graph above there is a movement along the demand curve from A to B indicating an increase in quantity demanded as price reduces. At point A, when the price was N5000 quantity bought was 40 bags. But when the price reduced to N4,000, quantity bought increased to 60 bags.

Decrease in Quantity Demanded
It is caused when the price of a commodity increase. It is shown as an upward movement along the demand curve from right to left.

From the graph above there is a movement (upward) along the demand curve from point A to point B indicating a decrease in quantity demanded as price increases. At point A when price was N3,000, quantity bough was 80 bags. But when price increased to N4000, quantity bought decreased to 60 bags.

Change in Demand (shift in Demand Curve)
Change in demand be it increase or decrease is as a result of other factors affecting demand (price of related commodity, income, Consumer preference), where price is held constant. It is also referred to as a shift in the demand curve

there are two types of Change in Demand:

• Increase in Demand (rightward shift in demand curve)
• Decrease in Demand (Leftward Shift  in demand curve)

Increase in Demand (rightward shift in demand curve)  
 An increase in demand is caused where more quantity of commodities are bought as a result of change in other factors affecting demand where price is held constant.

 From the graph above there is an increase in demand from 40 bags to 80 bags. but the price still remained N4500. This change is as a result of change in other factors affecting demand. It is a rightward shift in the demand curve from D0 to D1.

 Decrease in Demand (Leftward shift in Demand Curve) 
A decrease in demand is caused when less quantity of commodities are bought as a result of changes in other factors affecting demand where price is held constant.

 From the graph above there is a decrease in the supply from 80 bags to 40 bags. But the price still remained at N5,000. This change is as a result of changes in other factors affecting demand. it is a leftward shift in the demand curve from D1 to D2.

Note:  A change in quantity demanded is caused by change in price, while a change in demand is caused by changed in other factors affecting demand.

DEMAND

In our last article we talked about price mechanism which is the determination of prices by the forces of demand and supply. Now we ll be looking as the Demand aspect.

What is Demand?
In a layman terms, demand simply means a desire, a wish, or a mere want. In economics, demand
goes beyond the expression of mere desire, wish or want. It is the desire, wish or want which is
backed up by the ability to pay for what consumer desire, wish or want i.e. effective demand.
Demand is the quantity of goods and services which a consumer is willing and able to buy at a particular price over a given period of time where all other demand factors are held constant. In economics effective demand is what is only being referred to here.

Law of Demand 
It states that ceteris paribus, there is an inverse relationship between price and quantity demanded.
Ceteris paribus meaning all other things (other factors affecting demand) held constant.
Inverse meaning as one variable is going up, the other variable is coming down (price and quantity demanded). In other words, the law states that all other factors affecting demand held constant, the higher the price, the lower the quantity demanded and the lower the price, the higher the quantity demanded.

Explanation of law of Demand, you are a consumer and you want to buy an item if the price of the item is high, lesser quantity would be bought but if the price is low, higher quantity would be bought. The relationship between price and quantity demanded is inverse.

Representative Of Demand 
The demand for a commodity may be represented as a schedule, a curve or an equation.

Demand Schedule
It is a tabular representation that shows the relationship between price and quantity demanded

                                                     Demand Schedule for Bread
  

From the schedule above, we can see that as the price of Bread in bags are increasing the quantity demanded is deceasing and if the price is decreasing from N7,000 to N1,000 the quantity demanded is increasing.

Demand Curve
It is a graphical illustration that shows the relationship between price and quantity demanded or that shows the demand schedule

                                                          Demand curve For Bread  
 

The Demand curve from the above graph is downward slope from left to right (negative slope) indicating that are price is coming down (reducing) more quantity is bought (increasing). Or upward slope from right to left indicating that as price is going up(increasing), less quantity is bought (decreasing).


                                             The Demand Function/Equation
 In defining demand, we said it is the quantity of goods or services that consumers are willing and able to buy at a particular price over a given period of time where all other demand factors are held constant. The “other factors” that influence demand are expected to remain fixed and thus include prices of related goods and services (PR), consumer income (Y), consumer taste and preference which is in turn influenced by advertisement (A). The demand function or demand equation is a mathematical expression that relates the quantity demanded of goodsand services to all demand factors including the own price of the good or service. That is quantity demanded is affected by factors affecting demand.

Mathematically, the general demand function is stated as follows:QD = f (Po, Y, PR, A)Where QD = quantity demanded;Po = the own price of the commodity;Y = consumers’ incomes;PR = prices of other commodities;A = advertisement expenditure on good and service

This function or equation is read as, “Quantity demanded is a function of (or
depends on) the commodity’s own price, consumer income, prices pf other related
commodities, and the advertisement
 
When the other demand factors apart from the
commodity’s own price are held constant the general demand function reduces to:
 
Qd = f (Po )

Illustration

The demand function for Bread is given as:Qd = 140 – 0.02P,
where P is the price and Qd, the quantity demanded of the product.
Find the quantity that will be consumed when price is
(a) N1,000 (b) N1,500 
SolutionFrom the demand function:Qd = 140 – 0.02 P
(a) If price is N1,000, the quantity consumed will be:Qd = 140 – 0.02 (1,000) = 140 – 20 = 120i.e. consumers will buy 120 bags of Bread if the price is fixed at c1,000.(b) If price is N1,500, the quantity consumed will be:Qd = 140 – 0.02 (1,500) = 140 – 30 = 110i.e. consumers will buy 110 bags of Bread if the price is fixed at N1,500

Factors affecting Demand 

1. Price: it is one of the major factors that affects demand. Because is the basis which goods and services are demanded. Like earlier stated, as prices increases where other factors affecting demand are held constant, quantity demanded reduced. converse is the same when price reduces.
 
2. Consumer IncomeA change in consumer income may bring about a change in the demand for a good or service. However, the direction of change in demand will depend on the type of commodity in question.

i. For a normal good, demand might increase when consumer income
increases and demand might fall as consumer income falls, ceteris
paribus.
ii. For an inferior good, demand might decrease when consumer
income increases while demand might fall as consumer income
increases, ceteris paribus. Therefore, inferior goods are those goods
that we consume more when we are worse of financially and less
when we are better of. For instance, who would want to buy
“second hand” goods when he becomes richer?
iii. For a necessity, a change in consumer income may not affect
demand.

3. Prices of Related GoodsGoods relate to each other in two ways. Goods are either compliments or
substitutes

(i) Complimentary goods are goods with joint demand. They are needed jointly
before a want could be satisfied, e.g., car and petrol With complimentary
goods, a steep rise in the price of one will lead not to only to a fall in its
consumption but also a decrease in demand for the other good. A fall in the
price of car would lead to an increase in the demand for petrol 

(ii) Substitute goods are goods that only one is needed to satisfy a want/need
(not both). For substitutes, a fall in the price of one leads to a decrease in
demand for the other while an increase in the price of one leads to an
increase in the demand for the other, ceteris paribus. For example,
margarine and butter could be considered as examples of substitute goods.
An increase in the price of Klin will let people consume more
good mama if the price of butter does not change.
 
4. Consumer Taste/Preference Any change in consumer taste or preference causes demand to change. Increased taste or preference for a particular good causes demand to increase whilst declining taste or preference causes demand to fall, ceteris paribus. Taste or preference for goods and services are influenced by advertisement, fashion and sales promotions. 

5. Consumer Expectations The decision to buy commodity today is influenced by the expected future price of the commodity and expected change in consumer income. If a consumer anticipates the price of a commodity to increase in future, today’s demand for the commodity will increase but if the consumer anticipates a fall in future price, then today’s demand for the commodity will fall. Similarly, an expected consumer income increase may cause current demand for a normal commodity to increase and vice
versa.
 


Types of demand
 1. Joint/Complementary Demand Goods are said to be in joint/complementary demand when they produce more consumer satisfaction when consumed together than when consumed separately. They are mostly consumed together.Examples include bread and butter, car and petrol etc.
 
2. Competitive Demand Goods are said to be in competitive demand when they all compete for the same consumer’s income. They are seen as closed substitute to each other   i.e. goods that are alternative to one another in consumption. Examples are peak milk and dano milk; coke and pepsi etc.

3. Derived Demand This is where the demand for a final product leads to the demand for a second product which is used to produce this final product For example, the demand for furniture derives the demand for wood, the demand for petrol derives the demand for crude oil. Generally, demand for any factor of product is a derived demand.

4. Composite Demand A commodity is said to have a composite demand when it is demanded for alternative uses. For example, wood has composite demand because it is demanded for several alternative uses such as the making of table, chairs, windows, doors, body of vehicles, leather for making shoes, belt etc.  
 





 

PRICE SYSTEM (FREE MARKET SYSTEM)

Price is the value which is attached to goods and services and these goods are acquired in monetary system.
It is the monetary value of a commodity. It is the amount of money one exchanges for a
commodity. In the free market system, the price of a commodity is determined by the
interaction of the forces of market demand (the actions of buyers) and market
supply ( actions of sellers). The process by which the market forces of demand
and supply interact to fix the price of a commodity is referred to as the price system.The market system is the process by which the market forces of demand and supply
interact to fix price and the quantity of a commodity. It is the buyers and sellers who actually determine the price of a commodity. But sometimes the government controls the price mechanism to make commodities affordable for the poor people too.

The price mechanism plays three important functions in a market: 
1. Signalling Function:

• If prices are rising because of high demand from consumers, this is a signal to suppliers to expand production to meet the higher demand
• If there is excess supply in the market the price mechanism will help to eliminate a surplus of a good by allowing the market price to fall.
• Prices rise and fall to reflect scarcities and surpluses.

2. Transmission of preferences:

• Through their choices consumers send information to producers about the changing nature of needs and wants, what to be currently produced and the current price of the changed goods.
• Higher prices act as an incentive to raise output because the supplier stands to make a better profit.
• When demand is weaker in a recession then supply contracts as producers cut back on output.

3. Rationing function

• Prices serve to ration scarce resources when demand in a market is greater than supply.
• When there is a shortage, the price is increased – leaving only those with the willingness and ability to pay to purchase the product.

 

PRODUCTION POSSIBILITY CURVE (PPC)

PRODUCTION POSSIBILITY CURVE (FRONTIER)

It is a curve or graphical representation which shows the various combinations of two goods which a country can produce given that its available resources are full employed and efficiently utilized. The resources can be used to produce various alternative goods. But as a result of scarcity, choice has to be made between the alternate goods that can be produced. If it is decided to produce more of a certain goods; the production of the other goods has to be reduced. It is assumed that the economy can produce only two goods given his limited resources.

The assumptions of Production possibility curve are as follows;

Ø Only two goods good X and good Y are produced in varied proportion in the economy.

Ø The same resources used in the production of good X can be also used for the production of good Y.

Ø All available resources are fully employed.

Given these assumptions, a hypothetical production possibility schedule of the concerned economy is depicted in table 1.1

Table1.1 Production Possibility Schedule

Product Combination	Quantity of goods  X	Quantity of Goods Y	MRTxy
P	0	250	0
B	100	230	-1/5
C	150	200	-3/5
D	200	150	-1
P1	250	0	-3

The Law of Increasing opportunity cost

 

In Table1.1, it is shown that as more of good X is produced; less of good Y is produced successively leading to increasing opportunity cost (0,-1/5,-3/5,-1,-3). That is more resources are allocated towards the production of X, while the resources which are to be allocated to good Y are withdrawn.

The law of increasing opportunity cost state that given two goods produced in an economy, as more of a goods is being produced the more its opportunity cost increases. That is as production increases, opportunity cost increases. Production is directly proportional to opportunity cost.

The production possibility schedule illustrated in the table above (table 1.1) is graphically shown in the graphical illustration (figure 1.1) below.

Figure 1.1

Ø Scarcity: the boundary which is formed by the curve P and P1 indicates the maximum amount of goods that can be produced as a result of limited resources. If there are more resources available, then the boundary formed by the curve would have increased to the right.

Ø Full employment: All available resources are fully employed in the production of good X and Y forming the Boundary P and P1. There are no resources which is left unemployed.

Ø Unachievable output level:  The point outside the boundary point K, implies output level which cannot be achieved as a result of limited resources.

Ø Unemployment/underemployment: The point inside the boundary point R, implies that there are unused resources (unemployment) or resources are not efficiently utilized (underemployment).

Ø Marginal rate of transformation (MRT); It is the rate at which one good must be sacrificed in order to produce another good, assuming that both goods requires the same scarce resources. It is also a measure of opportunity cost.