Table of Contents
What is Supply?
Supply is a quantity of a commodity that a producer is willing and able to offer for a sale at a given price during a given period of time or It is the quantity of stock which a producer is willing to bring in the market for sale. For calculation of supply we are having a formulae.
S=f(Gf, P, I, Pr, T, N, E, Gp)
(Here S= Supply; Gf=Goal of the Firm; P=Product’s own price; I=Prices of inputs; Pr=prices of related goods; T=Technology; N=No. of suppliers; E=Expectations of producers; Gp=Govt. policies)
It includes mainly for essential elements:-
- Quantity of a commodity
- Willingness to sell
- Price of commodity
- Period of time
Law of Supply
Law of supply sates the direct relationship between price and quantity supplied, keeping other factors constant(ceteris paribus).in other words there is positive relationship between price and quantity supplied. But this relation need not be proportionate, i.e., it is not necessary that supply should double if the price doubles. Law of supply simply indicates the direction in which the supply will move as a results of change in price.
|As Price||Quantity of Supply|
|Increases (↑)||Increases (↑)|
Assumption of Law of Supply
- Price of other goods is constant.
- There is no change in technology.
- Price of factor of production remain the same.
- There is no change in the taxation policy.
- Goals of producer remains the same.
Supply schedule is a table showing various quantity of good that sellers would supply at various at prices during some time period, other things being equal. It has two aspects:- 1. Individual Supply Schedule 2. Market Supply Schedule
1. Individual Supply Schedule
Individual supply schedule is defined as the table which shows quantities of a given commodity which an individual producer will supply at all possible prices at a given time.
It is clear from above table as the price rises, supply extends. At Rs. 1 the seller is willing to sell the goods at quantity of 10 units. In this way the quantity extended to 50 units as the price increases.
2. Market Supply Schedule
Market Supply Schedule is defined as the table which shows the total quantity of the commodity that all the producer sell their products at each market price per period of time.
|Price of Goods||Supplier A||Supplier B||Market Supply|
Supply curve is defined as the curve which shows the quantity of the product of producers are willing to sell at different prices. It is generally slope upward because as the price increases the quantity is also increases. It is of two types:- 1. Individual Supply Curve 2. Market Supply Curve
1. Individual Supply Curve
On the basis of individual supply schedule as mentioned in figure. 1, the supply curve can be drawn. It is the positive slope. It means that price increases the quantity supplied also extended.
2. Market Supply Curve
Market supply cure is the sum of separate supply curve of all the producers in a market. As we have mentioned above in supply schedule, there are two individual supplier A and B. The market supply curve is the sum of the amounts of each prices. This curve is drawn with the help of Market Supply schedule as shown in figure in 2.
Important Points of Law of Supply
- It states the positive relationship between and quantity supplied assuming no change in other factors.
- It is a qualitative statement, as it indicates the direction if change in the quantity supplied, but it does not indicate the magnitude of the change.
- It does not establish any proportional relationship between change in price and the resulting change in quantity supplied.
- This Law is one sided as it explains only the change in the price on the supply and not the effect of change in the supply on the price.
Reasons of Law of Supply
- The basic aim of producer while supplying a commodity is to secure maximum profit.
- When the price of commodity increases, without any change in cost it raises their profits. So, producers increases the supply of commodity by increasing the production.
- With the fall in prices, supply also decreases as profit margin decreases at low prices.
CHANGE IN NO. OF FIRMS
- A rise in the price induces the producers to enter into the market to produce the given commodity. So as to earn higher profit.
- Increase in the no of firms raises the market supply.
- As the price starts falling, some firm which do not expect to earn any profits at low prices either stop the production or reduce it. It reduces the supply of the given commodity as the no. of firms in the market decrease.
CHANGE IN STOCKS
- When the price of goods increase, the seller are ready to supply more goods from their stocks.
- At a relatively lower price, the producers do not release big quantities from their stocks. They starts increasing their inventories with a view that price may rise in the near future.
Exception of Law of Supply
- If the seller expects a fall in the price in the future, the law of supply may not hold true. In this situation the seller will be willing to sell more at lower prices.
- If they expect the rise in the price in the future, they would reduce the supply of the commodity in order to supply the commodity later at a higher prices.
- This law of supply does not apply to agriculture goods as their production depends upon the climatic conditions.
- Goods like vegetables, fruits etc sellers will be ready to sell more even if the prices are falling.
- It happens because seller cannot hold the goods for a long time.
- Production and supply cannot be increased with rise in the price due to shortage of resources.