Applied Economics

Governor Pack Road, Baguio City, Philippines 2600

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade ___ - ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph

MODULE 4 – Applied Economics Subject Teacher:

CONCEPT OF SUPPLY
Learning Objectives:
At the end of the module, the students must be able to:
a. explain the concept of supply.
b. explain various concepts related to supply.
c. Prepare graph for quantity supplied.

INSTRUCTIONS: This module covers the Supply Concept. Read and understand the concepts and/or
terms discussed. Used these concepts in answering the exercises provided. Print this document
together with the exercise sheet. Have the exercise sheet submitted on the date provided by your
teacher.

I. THE SUPPLY CONCEPT

Supply refers to that level of production for goods and/or services in an economy in which
producers and/or suppliers are willing and able to produce and sell at a particular level of price (e.g.
10 sacks of rice is produced if they will be sold at ₱2,000. In its strictest sense, this is called quantity
supplied (QS). Every level of production relates to a specific level of price, which quantities and
amounts are shown in a tabular presentation called the supply schedule, and further drawn as a supply
curve (S) in a graphical illustration called the supply graph.

The following are the key concepts that are essential in fully understanding the Supply Concept:

1. Supply Schedule; Quantity Supplied at a given Price.

SUPPLY SCHEDULE
Price (₱) Quantity Supplied (Units)
1 200
2 400
3 600
4 800

The Supply Schedule is where the data regarding the level of production for a particular good
or service is identified. It further shows its relationship with Price. In order to describe their
relationship, Price is considered as the independent variable, while Quantity Supplied is the
dependent variable. In its simplest sense, quantity supplied changes with every change in price.
As such, if price increases from ₱ 1 to ₱ 2, Quantity Supplied follows to change from 200 units to
400 units.

2. Supply Graph and Supply Curve

SUPPLY GRAPH
5
4
PRICE (₱)

3
2
1 Supply
0
200 400 500 600
QUANTITY SUPPLIED (QS)

The supply graph is the graphical illustration for the relationship between price and quantity
supplied. It shows the upward sloping line called the supply curve.

3. The Law of Supply

The Law of Supply is fundamental in explaining the relationship between price and quantity
supplied. It holds that, ceteris paribus, whenever price increases, the quantity supplied also
increases. This is true due to the fact that producers and/or sellers are profit driven. Therefore,
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 Applied Economics
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade ___ - ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph

MODULE 4 – Applied Economics Subject Teacher:

an increase in the unit price would be an opportunity for them to increase the level of their
production to increase the level of their profits as well. In a graph, the supply curve would be
seen as an upward sloping curve because of the positive relationship between price as the
independent variable and the quantity supplied as the dependent variable.

The Law of Supply : (+) P = (+) QS Correct Presentation

( -) P = ( -) QS

(+) QS = (+) P Wrong Presentation

( -) QS = ( -) P

The second one is a misrepresentation of the Law of Supply because it explains

that the Price is the one dependent for every change in the Quantity Supplied,
rather than Price being the independent variable. Price should be the
independent variable while Quantity Supplied should be the dependent
variable. This must be clearly distinguished for purposes of facilitating correct
computations in the latter topics concerning supply.
Note: ceteris paribus is a Latin term which literally translates as: “all other things remain
constant”- as applied in economics, no other factor, but price, affects the change in the
quantity supplied.

I. THE SUPPLY FUNCTION

One important step in easily understanding the relationship between price and quantity supplied is
by formulating the Supply Function in such a manner that for each value of price, there corresponds
one value of quantity supplied. Supply function is normally written using the slope-intercept formula.

Supply Function :
f(x) = m x + b
QS = m P + b

Where :
QS = dependent variable; quantity supplied
P = independent variable; price
m = slope
b = y-intercept

Using the supply schedule for cotton, derive the supply function.
SUPPLY FOR COTTON
Price per Unit (P) Quantity Supplied (QS)
2 10
4 15

Step 1 : Determine which variables are independent and dependent.

SUPPLY FOR COTTON
P1 (x-independent) QS (y-dependent)
2 10
4 15

Step 2 : derive the slope m

m =
𝐲𝟐−𝐲𝟏 SUPPLY FOR COTTON
𝐱𝟐−𝐱𝟏 P1 (x-independent) QS (y-dependent)
∆𝐐𝐒 2 P1 10 Q1
= ∆𝐏 4 P2 15 Q2

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 Applied Economics
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade ___ - ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph

MODULE 4 – Applied Economics Subject Teacher:

𝐐𝟐−𝐐𝟏
= 𝐏𝟐−𝐏𝟏

𝐐𝟐−𝐐𝟏
m =
𝐏𝟐−𝐏𝟏

𝟏𝟓−𝟏𝟎
= 𝟒−𝟐

𝟓
= 𝟐 or 2.5

Note: The computed slope is positive because of the positive relationship between the price and
quantity supplied- if the price increases, the supply also decreases, or vice versa.

Interpretation : For every 1-peso change (increase or decrease) in price, there is a corresponding
change (increase or decrease) of 2.5 units in quantity supplied. This is the interpretation because
𝟐.𝟓
2.5 may also be expressed as 𝟏 .

Tip: If a calculator is not available, it would be more convenient to solve without decimal numbers.
𝟓
Thus, 𝟐 can be used in the interpretation: For every 2-peso change (increase or decrease) in price,
there is a corresponding change (increase or decrease) of 5 units in quantity supplied.

Step 3 : derive the y-intercept b

3.1 Write down the formula in slope-intercept form:
Thus, if m= 2.5 , then: QS= 2.5 P + b

3.2 Choose one point from the supply schedule and substitute it in the formula
Use (P1,Q1); (2,10) or (P2,Q2); (4,15)

(P1,Q1); (2,10) (P2,Q2); (4,15)

QS = 2.5 P + b QS = 2.5 P + b

10 = 2.5 (2) + b 15 = 2.5 (4) + b

10 =5+b 15 = 10 + b

b = 10 -5 b = 15 -10
b =5 b =5

3.3 Substitute the computed value of the y-intercept to the supply function:
QS= 2.5 P + b
QS= 2.5 P + 5

Note: The y-intercept is the value of QS if P=0. This is the same value of y in the graph when the
line intersects with the y-axis (take note of this because there is a different way to graph demand
and supply curves in the cartesian plane).

Thus, If P=0 @ QS= 2.5 P + 5

Then QS= 2.5 (0) + 5
QS= 0 + 5
QS= 5

Step 4 : Write the Supply Function as QS = m P + b

QS =mP+b
QS = 2.5 P + 5

Page 3 of 5
 Applied Economics
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade ___ - ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph

MODULE 4 – Applied Economics Subject Teacher:

Note: The importance of deriving the supply function is to aid in analyzing and answering more
problems and questions.

Answer the following questions using the derived supply function:

1. What is the level of production if price is at 20 pesos per unit?
QS = 2.5 P + 5 @ P= ₱ 20.00
QS = 2.5 (20) + 5
QS = 55 units

2. How much should cottons be sold if the production is at 1000 units?

QS = 2.5 P + 5 @ QS = 1,000 units
1,000 = 2.5 P + 5
1,000-5 = 2.5 P
995 = 2.5 P
𝟗𝟗𝟓
P =
𝟐.𝟓
P = ₱ 398.00

3. How much are producers willing to produce for free?

QS = 2.5 P + 5 @ P=0
QS = 2.5 (0) + 5
QS =0+5
QS = 5 units

4. Graph the Supply Function QS= 2.5 P + 5. The supply function is a linear function because there
is only one value of quantity supplied for a value of price.

Tips in making a graph for a linear function:

a. Use a graphing paper with smaller gridlines in order to make the graph more concise.
b. Derive the x-intercept: The value of P if QS = 0
c. Plot the x-intercept.
d. Assign more values for P at equal intervals with the first two points.
e. Draw a straight line connecting the points.
f. Name the supply curve using the supply function.

SUPPLY FOR COTTON

8
6 or
PRICE (₱)

4
2 QS= 2.5 P
0
10 15 20 25
QUANTITY SUPPLIED (QS)

Query: You might be wondering by now why Price, the independent variable, is on the y-axis
and the Quantity supplied, the dependent variable is on the x-axis. Should it not be the other way
around?

Answer: Mostly, in science, the independent variable is plotted on the x-axis, while the
dependent variable on the y-axis. Popularized by Alfred Marshall in 1890 shown in graphical
illustrations in his book Principles of Economics, demand and supply curves were drawn with the
price on the vertical axis because of the theory that price is the dependent variable- a theory
introduced by Leon Walras. Walras’ theory holds quantity demanded and supplied as the
independent variables, thus plotted on the x-axis. Economists, up until now, had nevertheless
adopted the manner these two influential people in the field of economics did their analyses during
their times, except for the theory that this time, price is the independent variable and quantity
demanded and supplied are the dependent variables.

Page 4 of 5
 Applied Economics
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade ___ - ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph

MODULE 4 – Applied Economics Subject Teacher:

ACTIVITY 4:
INSTRUCTION : Read and analyze the problems. Give what is being asked. If the problem requires for a
solution, make your solutions neat and concise. Put your final answers in a box. Write answers on a long
bond paper (hand-written) and submit the same to your subject teacher.

I. Philippines is one of countries which is considered as large producer of rice in Southeast Asia.
Rice, being a staple food for Filipinos, is a good subject to a careful analysis by economists.
Consider the data below and answer the questions.
SUPPLY FOR RICE
Price per sack of rice Quantity Supplied (QS)
₱ 1,800 100
1,900 150

a. Derive the Supply Function. (5 points)

b. Graph the Supply Function. (5 points)
c. Solve for the level of production if price per sack of rice is at ₱ 3,000? (5 points)
d. Solve for the price suppliers are willing to sell if production is at 2,000 units? (5 points)
e. How much would be produced if Price is equal to zero? (5 points)
f. Describe and explain the price elasticity of supply. Show your solutions. (5 points)

References:
1. Azarcon, et al. (2008). Principles of Economics. Baguio City: Valencia Book team.
2. Caoile, P. V. (2017). Applied Economics. Quezon City: Phoenix Publishing House, Inc.

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