SUPPLY FUNCTION AND DETERMINANT OF SUPPLY

SUPPLY FUNCTION: The functional relationship between quantity supplied of a commodity and its various determinants is known as a supply function. Which can be mathematically expressed as an equation like: S n = f (P n, Pr ,NF ,G, G p ,Pf, T ,E)

DETERMINANTS OF SUPPLY:

A producer aiming at maximising revenue would try to sell more & more units at higher and higher price. however, in real life business situation Quantity supplied by the seller depends on a number of other factors, which are known as determinants of supply.

Where, Sn=quantity supplied of commodity n Pn=price of n or commodity Pr=price of related good in production Nf=number of firms G=goal of the firm Gp=government policy T=State of technology E=expectation of future price

SUPPLY DETERMINANTSPn= as high money income is necessary to induce producers to produce more. There is direct or positive relationship between price of the commodity & its quantity supplied. Pr=(price of related goods in production) two products are substitutes in production, when an increase in the price of one product causes a reduction in the supply of the other product.

Nf= ( number of firms) increase in the number of firms implies increase in the market supply & conversely, decrease in the number of firm implies decrease in the market supply of the commodity.

G= (Goal of the firm) if the goal of the firm is revenue or profit maximisation, more quantity of commodity will be offered for sale at high price. If the good is sales maximisation more will be supplied even at the same price.

Gp=(govts. Policy) taxation & subsidy policy of the govt. also affected market supply of the commodity. imposited of tax, increase cost to the producer & hence discourage him to produce, thus tends to reduce supply. On the other hand, grant of subsidy encourage production & increase market supply. Pf=(factor price) when prices of factors of production rise, cost of production increase and supply will decrease. vice-versa, when price of factor of production decrease cost of production decrease and supply will increase.

I=(State of technology) improvement in the state of technology , reduce cost of production then profit will increase and induces the producer to supply more. E=(Expected future price) if the producer expects price of the commodity to rise in the future, current supply of the commodity should reduce. If on the other hand a fall in the price is expected, current supply will increase..