Theory of

Supply

SupplySupply is the Quantity of a commodity

which is offered for sale

at a given PRICE during

some particular TIME

SUPPLY AND QUANTITY SUPPLIED

SupplySupply refers to various quantities offered for sale at different possible prices of the commodity.

Quantity SuppliedIt refers to a specific quantity of a commodity that the producers are ready to sale at a specific price of the commodity

Market Supply refers to the sum total of various

quantities offered for sale by all the individual firms at

different prices

Individual supply refers to

different quantities

offered for sale by an individual firm at different

prices

Individual

Supply And

Market Supply

Supply ScheduleSupply schedule is a

tabular statement showing different quantities of a firm is ready to sell at different prices during a given period of time

Price of Ice Cream (₨)

Quantity Supplied(units)

5 0

10 10

15 20

20 30

Table1.individual

supply schedule

Price of Ice Cream(Rs)

Supply by firm ‘A’ (units)

Supply by firm ‘B’ (units)

Market Supply (units)

5 0 0 010 10 5 10+5=1515 20 10 20+10=3020 30 20 30+20=50Table2. Market Supply Schedule

SUPPLY CURVE

4 8 12 16 200102030405060

Quantity Suplied

Individual Supply Curve

price

Market Supply Curve

0 15 30 500

5

10

15

20

25

Quantity Supplied

price

Supply FunctionIt is a functional relationship between

quantity supplied of a commodity and factors affecting it.

Supply of commodity by a firm depends on price of the commodity itself(Pn), prices of other commodities(Pr), state of technology(T), cost of factors of production(F), objectives of the firm(O) etc.

This can be mathematically as shown below:

Sn=f(Pn, Pr, T, F, O ………..)

Price of the commodity:- At a higher price, producer offers more quantity of the commodity for sale and at a lower price, less quantity of the commodity is offered for sale. There is a direct relationship between price and quantity supplied is illustrated in the next section on “Law of Supply”.

Price of related Goods:- Supply of a commodity depends upon the prices of its related goods, specially substitute goods. If the price of a commodity remains constant and the price of its substitute good Z increases, the producers would prefer to produce substitute good Z. As a result, the supply commodity x will decrease and of good Z will increase.

Factors Determining Supply

State of Technology:- A change in technology of production which lessens cost of production increases supply of the commodity. As against this, the supply of those goods which are being produced with old and inferior technique causing increase in cost of production will fall.Cost of factor of Production:- A change in

the cost of production, i.e., prices of factors of production also affects the

supply of a commodity. If wages of labour or price of raw material increase, then cost of production will rise. As a result,

supply of the good will fall because producers would prefer to produce some other goods that can be produced at a

lower cost.

Objectives of Firm:- Sometimes, a firm may be induced to increase supply of a good not because it is more profitable but because its supply is a source of status and prestige in the market. Likewise, supply is also affected by the priority given to different objectives and the readiness to sacrifice the one for the other.

LAW OF SUPPLYThe 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 the price.

Px(Rs) Sx(units)

10 100

11 200

12 300

Table:3 Supply Schedule

100 200 3009

9.5

10

10.5

11

11.5

12

12.5

Supply Curve

Price

Supp ly

S

SS slopes upward from left to right. It shows positive relationship between price of the commodity and its

quantity supplied.

S

Assumptions of Law of Supply

Price of other related goods should not change

Technology of production should not change

Cost of production should remain the same

Goal of the firm should not changeTaxation policy of the govt. should

not change

EXCEPTIONS TO THE LAW OF SUPPLY

Law does not apply strictly to the agriculture products whose supply is governed by natural resources.

Supply of goods having social distinction will remain limited even if their price tends to rise.

Sellers may be willing to sell more units of a perishable commodity at a lower price.

Change in quantity supplied(Movement)

Expansion of SupplyIt refers to rise in

supply due to rise in the price of good.

It results in upward movement of the curve.

Contraction of SupplyIt refers to fall in

supply due to fall in price of the good.

It results in the downward movement of the curve.Price of

ice cream (Rs)

Quantity Supplied (units)

Description

1 1 Rise in price

5 5 Extension of supply

Price of ice

cream (Rs)

Quantity Supplied (units)

Description

5 5 Fall in price

1 1 contraction of supply

1 50

1

2

3

4

5

6

Suply Curve

a

a

b

Price

Supply

Expansion of Supply

1 50

1

2

3

4

5

6

Supply curve

b

S u p p ly

Price

Contraction of Supply

a

Change in Supply(Shift)Increase in SupplyIt means more

quantity supplied at the same price of the commodity.

It results in forward shift of supply curve.

Decrease in SupplyIt means less quantity

supplied at the same price of the commodity.

It results in backward shift of supply curve.

Price of ice cream (Rs)

Quantity Supplied (units)

10 2010 30

Price of ice cream (Rs)

Quantity Supplied (units)

10 3010 20

20 300

5

10

15

20

25

30

35

S1S2

Increase in Supply

Supply

Price

Supply curve shifts

forward from S1 to S2

20 300

5

10

15

20

25

30

35

S2S1

Supply

Price

Decrease in Supply

Supply curve shifts

backward from S1 to

S2

CAUSES OF INCREASE/DECREASE IN SUPPLY

Increase Decrease Improvement in

technique of production

Fall in price of related goods.

Fall in the cost of production

Fall in excise tax

Obsolete technique of production

Increase in price of related goods.

Increase in the cost of production

Rise in excise tax

Price Elasticity of supplyPrice elasticity of supply is a

measurement of percentage change in quantity supplied of a quantity supplied of a commodity in response to some percentage change in its price.

There are two well known methods of measuring price elasticity of supply. These are:-

(a)Proportionate method (b)Geometric method

PROPORTIONATE METHOD

According to this method, elasticity of supply 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 PriceEs= ∆Q×P ∆P×Q

Geometric MethodGeometrically, elasticity of supply depends

on the ‘origin’ of the supply curve. Assuming the supply curve to be a

straight line and positively sloped, we can conceive three possible situations of

elasticity of supply as in the following diagrams:

E=1, WHEN A STRAIGHT LINE, POSITIVELY SLOPED SUPPLY CURVE

STARTS FROM THE POINT OF ORIGIN ‘O’.

10 20 30 4005

1015202530354045

Supply Curve

Price

Supply

E>1, when a straight line, positively sloped supply curve

starts from Y-axis

0 20 40 6005

1015202530354045

Supply Curve

Price

Supply

E<1 when a straight line, positively sloped supply curve starts from X-axis.

10 20 30 400

2

4

6

8

10

12

14

16

Supply Curve

Price

Supply

100

5

10

15

20

25

Zero Elasticity Of supply(Es=0)

Price

Supply

Infinite Elasticity of Supply(Es=∞)

10 20 30 4002468

10121416

Supply Curve

Supply Curve

Supply

Price