Concept of Supply Supply refers to the quantity of a commodity offered for sale considering different possible prices at a point

of time. The supply of goods is the quantity offered for sale in a given market at a given time at various prices.

Individual Supply and Market Supply Individual supply refers to supply of a commodity by an individual firm in the market. Market supply refers to supply of a commodity by all the firms in the market producing/selling that particular commodity.

Supply Schedule Supply schedule is a tabular presentation of various quantities of a commodity offered for sale corresponding to different possible prices. It has two aspects (1) Individual Supply Schedule, (2) Market Supply Schedule.

(1) Individual Supply Schedule Individual supply schedule refers to supply schedule of an individual firm in the market. It shows supply response of a particular firm in the market.

(2) Market Supply Schedule Market supply schedule refers to supply schedule of all the firms in the market producing/supplying a particular commodity. Sum total of the firms producing a particular commodity is called Industry. Thus, market supply schedule refers to the supply schedule of the industry as a whole. It shows supply response of all the firms (producing a particular commodity) in the market.

Supply Curve Supply Curve is a graphic presentation of supply schedule, indicating positive relationship between price of a commodity and its quantity supplied. (1) (2) Individual Supply Curve Market Supply Curve

(1) Individual Supply Curve It is a graphic presentation of supply schedule of an individual firm in the market. Sloping upwards, it indicates positive relationship between price of a commodity and its quantity supplies.

Fig. 1

(2) Market Supply Curve Market supply curve is a graphic presentation of market supply schedule. It is supply curve of the industry as a whole.

Fig. 2 The market supply curve is a horizontal summation of the individual supply curves of the various firms producing a particular commodity in the market.

Supply Function Supply function studies the functional relationship between supply of a commodity and its various determinants. The supply of a commodity mainly depends on the goal of the firm, price of the commodity, price of other goods, prices of factors of production used in the production of the commodity and state of technology. In other words, supply of a commodity is a function of several factors as expressed in the from of the following equation: SX = f (PX, PO, NF, G, PF, T EX, GP) Here, SX = Supply of commodity X;f = Functional relation; P X = Price of commodity X; PO = Price of other goods; NF = Number of firms, G = Goal of the firm, PF = Price of factors of production, T = Technology; EX = Expected future price; GP= Government policy)

(1) Price of the Commodity: There is a direct relationship between price of a commodity and its quantity supplied. Generally, higher the price, higher the quantity supplied, and lower the price, lower the quantity supplied.

(2) Price of Other Goods: The supply of a good depends upon the prices of other goods. An increase in the prices of other goods makes them more profitable for the firms. They will increase their supply. On the other hand, the supply of the good, the price of which has not changed, will become relatively less profitable. The supply of such a good may decrease.

(3) Number of Firms: Market supply of a commodity also depends upon number of firms in the market. Increase in the number of firms implies increase in market supply and conversely, decrease in the number of firms implies decrease in market supply of a commodity.

(4) Goal of the Firm: If the goal of the firm is to maximize profits, more quantity of the commodity will be offered at high price. On the other hand, if the goal of the firm is to maximize sales or maximize output or employment more will be supplied even at the same price.

(5) Price of Factors of Production: Supply of commodity is also affected by the price of factors used for the production of the commodity. If the factor price decreases, cost of production also reduces, accordingly supply increases. Conversely, if the factor price increases cost of production also increases and supply tends to decrease.

(6) Change in Technology: Change in technology also affects supply of the commodity. Improvement in the technique of production reduces cost of production. Consequently, profits tend to increase inducing an increase in supply.

(7) Expected Future Price: If the producer expects price of the commodity to rise in the near future, current supply of the commodity should reduce. If, on the other hand, fall in the prices is expected, current supply should increase.

(8) Government Policy: Taxation and subsidy policy of the government also affects market supply of the commodity. Increase in taxation tends to reduce the supply, while subsides tend to induce greater supply of the commodity.

Law of Supply Law of supply states that, other things remaining constant; there is a positive relationship between price of a commodity and its quantity supplied. Thus more is supplied at higher price and less at the lower price. In other words, there is positive relation between the price and quantity supplied. The law of supply states that other things remaining constant, quantity supplied of a commodity increases with increase in the price and decreases with a fall in its price.

The law may also be explained with the help of supply curve, as under (Fig. 3):

Fig. 3

Supply curve (SS) slopes upward and shows increase in quantity supplied in response to increase in price of the commodity. Thus, quantity supplied increases from OL to OL1, when price rises from OP to OP 1.

Assumptions of the Law of Supply (1) There is no change in the prices of the factors of production. (2) There is no change in the technique of production. (3) There is no change in the goal of the firm. (4) There is no change in the prices of related goods. (5) Producers do not expect change in the price of the commodity in the near future.

Exceptions to the Law of Supply The Law of supply does not apply strictly to agricultural products whose supply is governed by natural factors. Supply of goods having social distinction will remain limited even if their price may rise high. Sellers may be willing to sell more units of perishable goods although their price may be falling.

Price Elasticity of Supply Price elasticity of supply is the measure of change in supply of a commodity de to change in its price. Law of supply tells us the direction in which supply will change as a result of change in price; that is fall and rise in price will lead to contraction and extension of supply. But, if we want to know how much supply will extend due to 10 percent rise in price, or, in what proportion the supply will change, then we will have to study price elasticity of supply. Thus, price elasticity of supply is the proportionate change in supply consequent upon proportionate change in price. Price elasticity of supply is a measurement of the percentage change in quantity supplies of a commodity in response to some percentage change in its price.

Measurement of Price Elasticity of Supply There are two well known methods of measuring price elasticity of supply (briefly called elasticity of supply). These are: (i) (ii) Proportionate (or Percentage) Method Geometric Method

(i)

Proportionate Method: According to this method, elasticity of supply (ES), is the ratio between percentage change in quantity supplied and percentage change in price of the commodity.
ES = Percentage Change in Quantity Supplied Percentage Change in Price

Symbolically,
Q 100 Q P Q ES = = P Q Q 100 P

Q : Initial quantity P : Initial Price Q : Change in quantity supplied P : Change in price of the commodity

(ii)

Geometric Method: Geometrically, elasticity of supply depends on the origin of the supply curve. Assuming the supply curve to be a straight line and positively sloped (sloping upward), we can conceive three possible situations of elasticity of supply as in the following diagrams:

Situation 1: ES = 1, when a straight line, positively sloped supply curve starts from the point of origin O.

Fig. 16

Situation 2: ES > 1, when a straight line, positively sloped supply curve starts from Y-axis.

Fig. 17

Situation 3: ES < 1, when a straight line, positively sloped supply curve starts from X-axis.

Fig. 18

Two Extreme Situations of ES (i) Zero Elasticity of Supply: It refers to a vertical straight line supply curve, showing constant supply, no matter what the price is. Fig. 19 illustrates this situation. Fig. 19 shows that quantity supplied remains constant at OS, whether price of the commodity is OP1 or OP2. Vertical straight line supply curve is also called a perfectly inelastic supply curve.

Fig. 19

(ii)

Infinite Elasticity of Supply: It refers to a horizontal straight line supply curve, showing infinite supply corresponding to a particular price of the commodity. Fig. 20 illustrates this situation.

Fig. 20

Fig. 20 shows that quantity supplied is infinite when price of the commodity is OS. It reduces to zero (in fact supply curve ceases to exist) even when price is slightly reduced.

Factors Affecting Elasticity of Supply The following are the main factors which affect the elasticity of supply of a commodity: (1) Nature of the Inputs used (2) Natural Constraints (3) Risk Taking (4) Nature of the Commodity: Perishable goods are relatively less elastic in supply than durable goods (5) Cost of Production (6) Time Factor a. Very Short Period b. Short Period c. Long Period (7) Technique of Production