NOTES ON SUPPLY

CHAPTER – 05

SUPPLY – LAW OF SUPPLY AND PRICE ELASTICITY OF SUPPLY

Definition of Supply

ü  Supply of a commodity refers to the quantity of a commodity which producers or sellers are willing to produce and offer for sale at a particular price during a particular period of time.

TYPES OF SUPPLY

1.      Individual Supply

It refers to a quantity of a commodity which a single producer is willing to produce and offer for sale at a particular price during a particular period of time.

2.      Market Supply / Industry’s Supply

It refers to a quantity of a commodity which all the producers are willing to produce and offer for sale at a particular price during a particular period of time.

DIFFERENCES BETWEEN STOCK AND SUPPLY

Stock	Supply
ü  Stock is the total amount of the commodity available with the producers. ü  It is unsold goods. ü  It has no time dimensions.	ü  Supply is the amount that producers are willing to bring into the market. ü  It is the part of stock which is offer for sale. ü  It has a time dimensions.

FACTORS AFFECTING SUPPLY (DETERMINANTS)

1.      Price of a Product / Commodity

There is a direct relationship between the price of a commodity and its supply. If the price of a product increases, then the supply of the product also increases and vice-versa.

2.      Goals of the Producers / Firms

Generally, supply of a commodity increases only at higher prices as it fulfills the objective of profit maximization. However, some firms are willing to supply more to capture extensive markets and to enhance their status and prestige, thereby fulfilling the objective of sales maximization. Similarly, if the firms aim at minimizing the risk, they will play safe, produce less and supply less.

3.      Input Prices / Factor Prices

The inputs such as raw materials, labour, equipment, machines etc. are available in sufficient quantity at lower price, and then there would be increase in production and supply and vice- versa.

4.      Prices of Related Commodities

The prices of substitutes and complementary goods also affect the supply of a product. For example, if the price of beans increases, then the farmers would tend to grow more beans than other vegetables. This would decrease the supply of other vegetables in the market.

5.      Technology

A better and advanced technology increases the production which results in the increase in the supply of product. For example, the production of fertilizers and good quality seeds increased the production of crops. This further increase the supply of food grains in the market.

6.      Nature of the Commodity

The supply is more on the goods produced by the competitive firms compared to the monopolized industry.

7.      Government’s Policies

The different policies of the government like taxation and subsidy policies have a greater impact on the supply of a product. For example, increase in the taxes (excise duty, sales tax etc.) would decrease the supply of a product and vice-versa.

8.      Expectations of Future Prices

In case producers expect an increase in the price of a commodity in future, then they will supply less today and if price is expected to fall in future, supply will naturally increase in the present period.

9.      Natural Factors

The climate conditions directly affect the supply of certain products. For example, the supply of agricultural products increases when monsoon comes on time. However, the supply of these products decreases at the time of drought, flood, etc.

10.  Agreement Among Producers

Sometimes producers may form a group and make some agreement to restrict the supply of a commodity to earn large profits. They will create artificial scarcity of the commodities, as a result supply decrease.

11.  Availability of Transport and Communication Facilities

A better transport and communication facilities will expand the size of the market. This will motivate the producers to produce and supply more.

SUPPLY FUNCTION

It states the relationship between the quantity supplied of a commodity and its determinants.

Thus:

Sn = f (Pn, P1…. Pn-1, Gf , Fi…Fm, T, E, Gt, N, Mt…)

 Where;

ü  S_n – Quantity supplied of a commodity ‘n’.

ü  f – Functional relation between supply and its determinants.

ü  P_n – Price of commodity ‘n’.

ü  P₁…. P_n-1 – Prices of all other commodities.

ü  G_f – Goal of the firm.

ü  F_i…F_m – Prices of different factors of production.

ü  T – Technique of production.

ü  E – Expectation of future prices.

ü  G_t – Taxation policy of the Government.

ü  N – Natural factors.

ü  M_t – Means of transportation.

LAW OF SUPPLY

The law of supply states that, other things remaining same, the quantity supplied increase with the increase in price and decrease with the decrease in price.

Assumptions of the Law

1.      There should be no change in the prices of related goods.

2.      No change in the taxation policy.

3.      The cost of production should remain unchanged.

4.      No change in the state of technology.

5.      The input prices should not change.

ü  The Law of Supply can be illustrated with the help of Supply Schedule and Supply Curve.

SUPPLY SCHEDULE

ü  It is a table showing various quantity of a commodity which producers / sellers are willing to produce and sell at different prices during a given period of time OR it is the tabular presentation of law of supply. It is of TWO types:

1.      Individual Supply Schedule

2.      Market Supply Schedule

Individual Supply Schedule

ü  It is a table showing various quantity of a commodity that an individual producer is willing to produce and sell at different prices during a given period of time.

Individual Supply Schedule for Potatoes

Price of Potatoes (Nu. Per kg)	Quantity Supplied (kg per Month)
Nu. 60 Nu. 50 Nu. 40 Nu. 30 Nu. 20	50 40 30 20 10

Market Supply Schedule

ü  It is a table showing various quantity of a commodity that all the producers / firm are willing to produce and sell at different prices during a given period of time.

Market Supply Schedule for Potatoes

Price (Nu. Per kg)	Quantity Supplied by Firm A (kg per Month)	Quantity Supplied by Firm B (kg per Month)	Market Supply (A+B) (kg per Month)
20 30 40 50 60	10 20 30 40 50	5 10 15 20 25	15 30 45 60 75

SUPPLY CURVE

ü  It is a curve showing various quantity of a commodity which producers / sellers are willing to produce and sell at different prices during a given period of time OR it is the diagrammatic presentation of the law of supply. It is of TWO types:

1.      Individual Supply Curve

2.      Market Supply Curve

Individual Supply Curve

ü  It is a curve showing various quantity of a commodity that an individual producer is willing to produce and sell at different prices during a given period of time OR it is the graphic presentation of individual supply schedule.

Market Supply Curve

ü  It is a curve showing various quantity of a commodity that all the producers are willing to produce and sell at different prices during a given period of time OR it is the graphic presentation of market supply schedule.