FINC 304

MANAGERIAL ECONOMICS

Session 2 – SUPPLY

Lecturer: Dr. AGYAPOMAA GYEKE-DAKO, UGBS

Contact Information: agyeke-dako@ug.edu.gh

College of Education
School of Continuing and Distance Education
2014/2015 – 2016/2017
 Session Overview
Both external and internal factors can influence the
activities of firms.
As producers, managers need to understand what factors
will influence the production of their goods. Like what we
saw in Demand, This will help them develop their own
competitive strategies and to respond to the actions of
other firms.
They also need to understand how public policy will
influence demand for their product. Studying supply is
helpful in understanding such issues.

Agyapomaa Gyeke-Dako (PhD) 4/27/2018 Slide 2

 Session Outline
The key topics to be covered in the session are as follows:
• Definition of Supply
• Factors that influence Supply

Agyapomaa Gyeke-Dako (PhD) 4/27/2018 Slide 3

 Reading List
• Baye Michael and Prince Jeffrey: Managerial Economics and
Business Strategy 8th Edition, Chapter 2

Agyapomaa Gyeke-Dako (PhD) 4/27/2018 Slide 4

 Supply
• Supply shows a relationship between the market
price of a commodity and the amount the
producer is willing and able to produce and sell.
• The market supply is a horizontal summation of all
individual supply curves

• The supply curve has a positive slope. It slopes

•
upwards
• the higher the price, the higher the quantity firms make available for
sale vice versa

Agyapomaa Gyeke-Dako (PhD) 4/27/2018 Slide 5

 Determinants of Supply
• Technology
• Firms using obsolete technology for producing a commodity means
producers can produce and supply less at every price
•

• Cost of Production- coming from input cost

• A reduction in the cost of inputs makes it cheaper for consumers to put

goods on the markets for sale
• Price of technologically related goods
• If you produce multi-crops, you may want to produce more of wheat and
less of maize if the relative price of wheat increases. These are
substitutes under supply. For complements, more of a good will be put
on the market for sale if the price of its complement increases
• Government policies
• Government taxes/subsidies affect he quantity that producers can
produce and supply
Agyapomaa Gyeke-Dako (PhD) 4/27/2018 Slide 6
 Change in Supply vs Change in
Quantity Supplied
• A change in supply causes a shift of the supply
curve to the left (decrease in supply) or to the
right (an increase in supply)
• Other determinants of supply apart from the price of the product
causes a change in supply
• Eg an increase in wages, or discovery of a better technology
would all lead to a change in supply

• A change in quantity supplied causes a

movement along the same supply curve
• A change in quantity supplied is caused only by a change in
the goods own price

Agyapomaa Gyeke-Dako (PhD) 4/27/2018 Slide 7

 Supply function
Q sx = f (Px , Pr , W , H)
Q sx is quantity supplied x, Px is the price of good x, Pr is price of
good technologically related to good x, W is price of inputs and H
denotes all other determinants of quantity supplied of good x
This a general supply function

A specific example is the linear supply function

Q sx = β0 + βx Px + βy Py + βm W + βH H
If we assume some parameter values, we have:
Q sx = 20 + 12Px − 3Py − 25W + 6S or assuming specific
values for the parameters,
Q sx = 20 + 12Px − 3(6) − 25(10) + 6(10) = −188 + 12Px
Agyapomaa Gyeke-Dako (PhD) 4/27/2018 Slide 8
 Producer Surplus
• The producer surplus is the difference between the
minimum price the producer is willing to accept and
the actual market price.
• Given upward-sloping supply curve the producer is
willing to accept less for the initial quantities of the
product
• But there is a unique equilibrium price which is
charged for all units sold including units the
producer was willing to accept less for
• Under this circumstance, the producer benefits and the
consumer misses out
Agyapomaa Gyeke-Dako (PhD) 4/27/2018 Slide 9