Concept
Features of supply
Before we proceed with the meaning of supply, it is important to understand some special features of supply:
Concept
MEANING OF SUPPLY
Like demand, supply is also expressed as a relationship between price and quantity.
Supply refers to quantity of a commodity that a firm is willing and able to given price during a given period of time.
The definition of supply highlights 4 essential elements:
Concept
Individual Supply & Market Supply
Like demand, supply also can be either for a single seller (Individual Supply) or for all the sellers (Market Supply).
Concept
Supply and Stock
The term 'supply' is often confused with stock of the commodity. However, in economics, the two terms are different.
Stock refers to total quantity of a particular commodity that is available with the firm at a particular point of time.
On the other hand, supply is that part of stock which a producer is willing to bring in the market for sale. Stock can never be less than the supply.
For example, if a seller has 50 tonnes sugar in his godown and he is willing to sell 30 tonnes @37 per kg, then supply is 30 tonnes and stock is 50 tonnes.
Supply Vs Stock
Concept
DETERMINANTS OF SUPPLY (INDIVIDUAL SUPPLY)
There are several important factors that determine supply of a commodity. A change in any one of these factors will result in a change in supply of the commodity. Some of the important factors affecting supply are:
Price of the given Commodity:
Most important factor determining the supply of a commodity is its price. As a general rule, price of a commodity and its supply are directly related.
It means, as price increases, the quantity supplied of the given commodity also rises and vice-versa. It happens because at higher prices, there are greater chances of making profit. It induces the firm to offer more for sale in the market.
Supply (S) is a function of price (P) and can be expressed as: S=f(P). The direct relationship
price and supply, known as "Law of Supply”.
The following determinants are termed as 'other factors' or 'factors other than price.
Prices of Other Goods:
As resources have alternative uses, the quantity supplied of a commodity depends not only on its price, but also on the prices of other commodities. Increase in the prices of other goods makes them more profitable in comparison to the given commodity. As a result, the firm shifts its limited resources from production of the given commodity to production of other goods.
For example, increase in the price of other good (say, wheat) will induce the farmer to use land for cultivation of wheat in place of the given commodity (say, rice),
Prices of Factors of Production (inputs):
When the amount payable to factors of production and cost of inputs increases, the cost of production also increases. This decreases the profitability. As a result, seller reduces the supply of the commodity. On the other hand, decrease in prices of factors of production or inputs, increases the supply due to fall in cost of production and subsequent rise in profit margin.
To make ice-cream, firms need various inputs like cream, sugar, machine, labour, etc. When price of one or more of these inputs rises, producing ice-creams will become less profitable and firms supply fewer ice-creams.
State of Technology:
Technological changes influence the supply of a commodity. Advanced V and improved technology reduces the cost of production, which raises the profit margin. It induces the seller to increase the supply. However, technological degradation or complex and outdated technology will increase the cost of production and it will lead to decrease in supply.
Government Policy (Taxation Policy):
Increase in taxes raises the cost of production and, thus, reduces the supply, due to lower profit margin. On the other hand, tax concessions and subsidies increase the supply as they make it more profitable for the firms to supply goods.
Goals / Objectives of the firm:
Generally, supply of a commodity increases only at higher prices as it fulfills the objective of profit maximization. However, with change in trend, some firms are willing to supply more even at those prices, which do not maximise their profits. The objective of such firms is to capture extensive markets and to enhance their status and prestige.
Concept
Change in Quantity Supplied Vs Change in Supply
Change in Quantity Supplied:
Whenever supply for the given commodity changes due to change in its own price, then such change in supply is known as "Change in Quantity Supplied.
For example, If supply of Close-Up changes due to change in its own price, then such change in supply for Close-Up is known change in quantity supplied.
Change in Supply:
Whenever supply for the given commodity changes due to factors other than price, then such change in supply is known as "Change in Supply".
For example, If supply of Close-Up changes due to change in price of other goods or due to change in technology or due to change in taxation policy, then such change in supply for Close-Up is known as change in supply.
Test Yourself
Identify the following as change in quantity supplied or change in supply:
(Ans: Change in quantity supplied)
(Ans: Change in Supply )
(Ans: Change in Supply)
(Ans: Change in quantity supplied)
Concept
DETERMINANTS OF MARKET SUPPLY
Market supply is influenced by all the factors affecting individual supply. In addition, it is also affected by the following factors:
Number of Firms in the market.
When the number of firms in the industry increases, market supply also increases due to large number of producers producing that commodity. However, market supply will decrease, if some of the firms start leaving the industry due to losses.
Future Expectation regarding price:
If sellers expect a rise in price in near future, then current market supply will decrease in order to raise the supply in future at higher prices. However, if the sellers fear that the prices will fall in the future, then they will increase the present supply to avoid losses in future.
Means of Transportation and Communication:
Proper infrastructural development, like improvement in the means of transportation and communication, help in maintaining adequate supply of the commodity.
Determinants of Market Supply
1. Price of the given commodity
2. Price of other goods
3. Prices of factors of production (inputs)
4. State of technology
5. Government Policy (Taxation Policy)
6. Goals/Objectives of the firm.
7. Number of firms
8. Future expectation regarding price
9. Means of transportation and communication
Concept
SUPPLY FUNCTION
Like demand, the supply of a commodity also depends on a number of factors. When all the determinants of supply are put together in the form of a functional relationship, it is termed as 'Supply Function".
Supply function shows the functional relationship between quantity supplied for a particular commodity and the factors influencing it.
It can be either with respect to one producer (individual supply function) or to all the producers in the market (market supply function).
Concept
Individual Supply Function
Individual supply function refers to the functional relationship between supply and factors affecting the supply of a commodity.
It is expressed as: S,= f (Px, Po, Pf, St , T, G)
Where
Sx,= Supply of the given commodity x;
Po= Price of other goods,
Px= Price of given commodity x:
St= State of technology:
G= Goals of the firm.
Pf = Prices of factors of production:
T= Taxation policy.
Concept
Market Supply Function
Market supply function refers to the functional relationship between market supply and factors
affecting the market supply of a commodity.
As discussed before, market supply is affected by all the factors affecting individual supply. In addition, it is also affected by some other factors like number of firms, future expectations regarding price and means of transportation and communication.
Market supply function is expressed as:
S = f (Px, Po, Pf, St , T, G, N, F, M)
Where,
Sx =, Market supply of given commodity x
Po= Price of other goods:
Px = Price of the given commodity x
Pf = , Prices of factors of production;
T= Taxation policy:
N= Number of firms;
St = State of technology.
G= Goals of the market:
F= Future expectation regarding Px ,
M= Means of transportation and communication.
Concept
SUPPLY SCHEDULE
Supply schedule is a tabular statement showing various quantities of a commodity being supplied at various levels of price, during a given period of time.
Like demand schedule, supply schedule is also of two types:
1. Individual supply schedule
2. Market supply schedule.
Concept
Individual Supply Schedule
Individual supply schedule refers to a tabular statement showing various quantities of a commodity that a producer is willing to sell at various levels of price, during a given period of time.
Table shows a hypothetical supply schedule for commodity 'x'
Table : Individual Supply Schedule
Price Quantity supplied of good x (units)
1 5
2 10
3 15
4 20
5 25
As seen in the schedule, quantity supplied of commodity x increases with increase in price the producer is willing to sell 5 units of x at price of 1. When the price rises to ₹ 2, supply also rises to 10 units.
Concept
Market Supply Schedule
Market supply schedule refers to a tabular statement showing various quantities of a commodity that all the producers are willing to sell at various levels of price, during a given period of time. It is obtained by adding all the individual supplies at each and every level of price.
Market supply schedule is expressed as: Sm = SA + SB +……….
Where Sm, is the market supply and SA+SB+….. are the individual supply of supplier A, supplier B & so on.
Let us understand the derivation of market supply schedule with the help of Table
(Assuming, there are only 2 producers: A and B in the market):
Table : Market Supply Schedule
Price (₹) Individual Supply Market Supply
Px. (Units). (Units)
SA. SB. SA +. SB
5. 10. 5+10=15
10. 20. 10+20=30
15. 25. 15+25=40
20. 35. 20+35=55
25. 40. 25+40=65
As seen in Table, market supply is obtained by adding the supplies of suppliers A and B at different prices. At price of 1, market supply is 15 units. When price rises to ₹2, market supply rises to 30 units. So, market supply schedule also shows the direct relationship between price and quantity supplied
Concept
Supply Vs Quantity Supplied
Before we proceed further, it is important to understand the difference between supply and quantity supplied.
Supply: Supply refers to different quantities of a commodity that the producer is ready to sell at different levels of prices.
For example, there is a supply of 5 units at 1; supply is 10 units at 2 and so on. It means, supply describes the behaviour of the firm at every possible price.
Quantity Supplied. Quantity supplied refers to a specific quantity, in the supply schedule, supplied against a specific price.
For example, 5 units are supplied at price of ₹ 1. The
term 'quantity supplied’ makes sense only in relation to a particular price.
Concept
SUPPLY CURVE
Supply Curve refers to a graphical representation of supply schedule. It is the locus of all the points showing various quantities of a commodity that a producer is willing to sell at various levels of price, during a given period of time, assuming no change in other factors.
It shows the direct relationship between price and quantity supplied, keeping other factor constant.
It can be drawn for any commodity by plotting each combination of the supply schedule on a graph. Like supply schedules, supply curves can also be drawn both for individual producer and for all the producers in the market. So, supply curve is of two types:
Concept
Individual Supply Curve
Individual supply curve refers to a graphical representation of individual supply schedule.
Supply curve 'SS' in Fig. 9.1 is obtained by plotting the points shown in Table 9.1. At each possible price, there is a quantity, which the firm is willing to sell. By joining all the points (A to E), we get a curve that slopes upwards.
The supply curve SS slope upwards due to positive relationship between price and quantity supplied.
Concept
Market Supply Curve
Market supply curve refers to a graphical representation of market supply schedule. It is obtained by horizontal summation of individual supply curves.
The points shown in Table 9.2 are graphically represented in Fig. 9.2 SA and SB are the individual supply curves. Market supply curve (SM) is obtained by horizontal summation of the individual supply curves (SA and SB).
Market supply curve S is also positively sloped due to positive relationship between price and quantity supplied.
Market Supply Curve is Flatter
Market supply curve is flatter than all individual supply curves. It happens because with a change in price, the proportionate change in market supply is more than the proportionate change in individual supplies.
Concept
Slope of Supply Curve
As stated before, slope of a curve is defined as the change in the variable on the Y-axis divided by the change in the variable on the X-axis So, the slope of the Supply Curve equals the Change in Price divided by the Change in Quantity.
Let us calculate the slope of supply curve with the help of following diagram:
In the given diagram, when price rises from ₹4 to ₹8, then quantity supplied increases from 2 units to 4 units. In such a case, the slope of supply curve will be:
Concept
LAW OF SUPPLY
Economists have studied the behaviour of sellers, just as they have studied the behaviour of buyers. As a result of their observations, they have arrived at the law of supply. Law of supply states the direct relationship between price and quantity supplied, keeping other factors constant (ceteris paribus).
We know, price is the dominant factor in determining supply of a commodity As price of the commodity increases, there is more supply of that commodity in the market and vice-versa. This behaviour of producers is studied under the law of supply.
Concept
Assumptions of Law of Supply
While stating law of supply, the phrase "keeping other factors constant or ceteris paribus are used. This phrase is used to cover the following assumptions on which the law is based:
Price of other goods are constant;
There is no change in the state of technology
Prices of factors of production remain the same
There is no change in the taxation policy
Goals of the producer remain the same.
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Law of supply can be better understood with the help of Table 9.3 and Fig. 9.3:
Table 9.3: Supply Schedule
Table 9.3 clearly shows that more and more units of the commodity are being offered for sale as the price of the commodity is increased. As seen in Fig. 9.3, supply curve SS slope upwards from left to right, indicating direct relationship between price and quantity supplied.
Concept
Important Points about Law of Supply
It states the positive relationship between price and quantity supplied, assuming no changes in other factors.
It is a qualitative statement, as it indicates the direction of change in the quantity supplied. but it does not indicate the magnitude of change.
It does not establish any proportional relationship between change in price and the resultant change in quantity supplied.
Law is one sided as it explains only the effect of change in price on the supply, and not the effect of change in supply on the price.
Concept
Reasons for Law of Supply
Let us now try to understand, why the supply of a commodity expands as the price rises. The main reasons for operation of law of supply are:
Profit Motive: The basic aim of producers, while supplying a commodity, is to secure maximum profits. When price of a commodity increases, without any change in costs, it raises their profits. So, producers increase the supply of the commodity by increasing the production. On the other hand, with fall in prices, supply also decreases as profit margin decreases at low prices.
Change in Number of Firms: A rise in price induces the prospective producers to enter into the market to produce the given commodity so as to earn higher profits. Increase in number of firms raises the market supply. However, as the price starts falling, some firms which do not expect to earn any profits at a low price, either stop the production or reduce it. It reduces the supply of the given commodity as the number of firms in the market decreases.
Change in Stock: When the price of a good increases, the sellers are ready to supply more goods from their stocks. However, at a relatively lower price, the producers do not release big quantities from their stocks. They start increasing their inventories with a view that price may rise in near future.
Concept
Exceptions to Law of Supply
As a general rule, supply curve slopes upwards, showing that quantity supplied rises with a rise in price. However, in certain cases, positive relationship between supply and price may not hold true.
The various exceptions to the law of supply are:
Future Expectations:
If sellers expect a fall in price in the future, then the law of supply may not hold true. In this situation, sellers will be willing to sell more even at a lower price. However, if they expect the price to rise in the future, they would reduce the supply of the commodity, in order to supply the commodity later at a high price.
Agricultural Goods:
The law of supply does not apply to agricultural goods as their production depends on climatic conditions. If, due to unforeseen changes in weather, the production of agricultural products is low, then their supply cannot be increased even at higher prices.
Perishable Goods:
In case of perishable goods, like vegetables, fruits, etc., sellers will be ready to sell more even if the prices are falling. It happens because sellers cannot hold such goods for long.
Rare Articles:
Rare, artistic and precious articles are also outside the scope of law of supply. For example, supply of rare articles like painting of Mona Lisa cannot be increased, their prices are increased.
Backward Countries:
In economically backward countries, production and supply cannot be increased with rise in price due to shortage of resources.
Concept
Movement along the supply curve (change in quantity supplied)
When quantity supplied of a commodity changes due to change in its own price, keeping other factors constant, it is known as 'change in quantity supplied'. It is graphically expressed as a movement along the same supply curve.
There can be either a downward movement (Contraction in supply) or an upward movement (Expansion in supply) along the same supply curve. Let us understand the movement along the supply curve with the help of Fig. 9.4
In Fig. 9.4, OQ quantity is supplied at the price of OP. Change in price leads to an upward or downward movement along the same supply curve:
Upward Movement: When price rises to OP1, quantity supplied also rises to OQ1 (known s expansion in supply), leading to an upward movement from A to B along the same supply curve SS.
Downward Movement: On the other hand, fall in price from OP to OP2, leads to decrease in quantity supplied from OQ to OQ2 (known as contraction in supply), resulting in a downward movement from A to C along the same supply curve SS.
Concept
Expansion in Supply
Expansion in Supply refers to a rise in the quantity supplied due to increase in price of the commodity, other factors remaining constant.
It can be better understood from Table 9.4 and Fig. 9.5.
Table 9.4: Expansion in Supply
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As seen in given schedule and diagram, quantity supplied rises from 100 units to 150 units, with an increase in price from ₹20 to ₹25, resulting in an upward movement from A to B, along the same supply curve SS.
Concept
Contraction in Supply
Contraction in supply refers to a fall in the quality supplied due to decrease in price of the commodity, other factors remaining constant.
It can be better understood from Table 9.5 and Fig 9.6.
Table 9.5: Contraction in Supply
As seen in given schedule and diagram, quantity supplied falls from 100 units to 70 units, with a decrease in price from ₹20 to ₹15, resulting in a downward movement from A to B, along the same supply curve SS.
Shift in Supply Curve (Change in Supply)
Supply curve is drawn to show the relationship between price and quantity supplied of a commodity, assuming all other factors being constant. However, other factors are bound to change sooner or later. A change in one of ‘other factors’ shifts the supply curve.
For example, an increases in tax on a commodity will raise its cost of production. With fall in profit margin, producers may decrease its supply, even though its market price has not
Changed. Such decrease in supply, whose price has not changed, cannot be represented by the original supply curve. It will lead to a shift in supply curve. When supply of a commodity changes due to change in any factor other than the own price of the commodity, it is known as 'change in supply'. It is graphically expressed as a shift in the supply curve.
Various Reasons for Shift in Supply Curve:
(i) Change in the price of other goods;
(ii) Change in the price of factors of production;
(iii) Change in the state of technolgy;
(iv) Change in taxation policy;
(v) Change in objectives of the firm;
(vi) Change in the number of firms;
(vii) Future expectation of change in price.
Let us now understand the concept of shift in supply curve through Fig. 9.7:
In Fig. 9.7, supply is OQ at the price of OP. Change in other factors leads to a rightward or leftward shift in the supply curve:
Concept
Increase in Supply
Increase in supply refers to a rise in the supply of a commodity caused due to any factor other than the own price of the commodity. In this case, supply rises at the same price or supply remains same even at lower price. It leads to a rightward shift in the supply curve as seen in Fig. 9.8.
Table 9.6: Increase in Supply
As seen in the given schedule and diagram, supply rises from 100 units to 150 units at the same price of ₹20, resulting in a rightward shift of the supply curve from SS to S1S1.
Concept
Decrease in Supply
Decrease in supply refers to a fall in the supply of a commodity caused due to any factor other than the own price of the commodity. In this case, supply falls at the same price or supply remains same even at higher price.
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It leads to a leftward shift in the supply curve as seen in Fig. 9.9.
Table 9.7: Decrease in Supply
As seen in the given schedule and diagram, supply falls from 100 units to 70 units at the same price of ₹20, resulting in a leftward shift of the supply curve from SS to S1S1.
Concept
9.10 Movement along supply curve vs shift in supply curve
Concept
Expansion in Supply Vs Increase in Supply
Concept
Change in Quantity Supplied Vs Change in Supply
Concept
Contraction in Supply Vs Decrease in Supply
Concept
Proportionate Method
The percentage method can also be converted into the proportionate method. Putting the values of 1,2,3 and 4 in the formula of percentage method, we get:
Elasticity is a ‘Unit Free’ Measure
The coefficient of price elasticity of supply is a pure number and is independent of price and quantity units. It happens because elasticity considers percentage change in price and quantity supplied.
Price Elasticity of Supply is Positive
So far, we have seen that the concept of elasticity of supply is similar to the concept of elasticity of demand. However, there is one deference. Elasticity of Supply will always have a positive sign as against the negative sign of elasticity of demand. It happens because of the direct relationship between price and quantity supplied.
Example 4. With the help of supply function: Qs = -10 + 2p, answer the following questions:
Solution:
Qs = - 10 + 2 × 7 = 4 units
0 = - 10 + 2p. It means, p = ₹5.
50 = -10 + 2p. It means, p = ₹30.
Example 3. The supply function of a commodity x is given by Qs = 20 + 3Px. Prepare the supply schedule, if price of commodity x varies from ₹5 to ₹2:
Solution:
Values of supply (Qs) are calculated after putting the values of price (Px) in the supply function:
Qs = 20 + 3Px
Practicals on Elasticity of Supply
Formula of Elasticity of Supply
Example 8. The supply for a good is 50 units at the price of ₹ 10. When price rises by ₹5, supply also rises by 50 units. Calculate price elasticity of supply.
Ans. Es=2 (Supply is highly elastic as Es > 1)
Es is always positive due to direct relationship between price and quantity supplied
Example 18. At a price of 8 per unit, the quantity supplied of a commodity is 200 units. Its price elasticity of supply is 1.5. If its price rises to ₹ 10 per unit, calculate its quantity supplied at the new price.
As price increases, the quantity supplied will also increase. It means,
New Quantity = Original Quantity (Q) + Change in Quantity (
Q)
= 200 + 75 = 275 units
Ans. New Quantity = 275 units
Example 11. Calculate price elasticity of supply when:
The price rises from ₹2 to ₹3 for both A and B.
Why are their elasticities different?
Ans. Es = 2 (Supply is highly elastic as Es > 1)
Es is always positive due to direct relationship between price and quantity supplied
(ii) Though change in the quantity supplied is same (20 units) in both the cases, but elasticities of supply is different as proportionate change in supply in both the cases is different.
Example 14. When the price of a good falls from ₹8 per unit to ₹6 per unit, its supply falls by 25 units from 125 units. Calculate elasticity of supply (Es) by percentage method.
Es is always positive due to direct relationship between price and quantity supplied
Example 30. When price of a commodity falls by just 10%, the total revenue of a firm become half of the original total revenue. If at the new price of Rs.45, only 10 units are supplied, calculate original quantity and price elasticity of supply.
*Original Price: Let Original Price be x. Given: x = 45+ 10% of x. It means, x = 50.
**Original Total Revenue is double of New Total Revenue. So, Original Total Revenue = 2 x 450 = Rs.900.
Example 24. The price elasticity of supply of commodity X and Y are equal. The price of X falls from 10 to 8 per unit and its quantity supplied falls by 16 per cent. The price of Y rises by 10 per cent. Calculate the percentage increase in its supply.
Solution: In the given example, we will first calculate Price Elasticity of Good X
Now, Price Elasticity of Good Y=0.8 (as both X and Y have same price elasticity).
Let us now calculate % rise in Supply for Y
Percentage rise in supply = 8%
Ans. Supply for Good Y will rise by 8%
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