CHAPTER-9 SUPPLY

MEANING OF SUPPLY

Supply refers to quantity of a commodity that a firm is willing and able to offer for sale at a given price during a given
period of time.

Supply and Stock Stock refers to total quantity of a particular commodity that is available with the firm at a particular point of
time. Where as supply is that part of stock which producer is willing to sale in market.

DETERMINATION OF SUPPLY (INDIVICUAL SUPPLY)

1. Price of the given Commodity (PX ) : Price of a commodity and its supply are directly related i.e as price increases,
the quantity supplied of the given commodity also increases and vice-versa. It is because higher prices mean higher
profits.
2. Price of Other Goods (Po) : Increase in the prices of other goods makes them more profitable in comparison to the given
commodity. As a result the firm shifts its resources from production of given commodity to production of other goods.
Hence price of other goods and supply of given commodity are inversely related.
3. Prices of Factors of Production /inputs (Pf) : When the price of inputs increases, the cost of production also increases.
This decreases the profitability of producer and hence seller reduces the supply of the commodity. And vice-versa. So
Prices of Factors of Production /inputs and supply of the given commodity are inversely related.
4. State of Technology (St) : Advanced and improved technology reduces the cost of production and rises the profit
margins, hence seller increases the supply. Whereas technological degradation has opposite effect. So State of
Technology and supply of the given commodity are directly related.
5. Government Policy (Taxation Policy) (T) : Increase in taxes and withdrawl of subsidies raises the cost of production
and thus reduces the supply, due to lower profit margins whereas tax concession and subsidises increases the supply as it
lowers the cost of production and increases the profit margins.
6. Goals/objective of the firm (G): If the goal of the firm is to capture extensive markets and to enhance their status
and prestige ,then the firms are willing to supply even at low prices. Whereas if the firm aims at profit
maximization it will increase supply only at higher prices.

DETERMINANTS OF MARKET SUPPLY

1. Number of Firms in the market (N) : With increase in the number of firms in the market supply also increases and
vice-versa. Hence Number of Firms in the market and supply of the given commodity are directly related.
2. Future Expectation regarding price (F) : If sellers expects a rise in price in near future then current market supply will
decrease and vice-versa. Hence Future Expectation regarding price and supply of the given commodity are inversely
related.
3. Means of Transportation and Communication (M) : Proper infra structure, means of transport and communication
increases the supply of the given commodity.

SUPPLY FUNCTION Supply function shows the functional relationship between quantity supplied for a particular commodity
and the factors influencing it. Individual supply function SX= f (PX, PO, Pf, St, T, G) Market Supply Function SX= f (PX,
PO, Pf, St, T, G, N, F, M)

SUPPLY SCHEDULE Supply schedule is a tabular statement showing various quantities of a commodity being supplied at
various levels of price, during a given period of time.

Price (in Rs.) Quantity (in units)

1 10
2 20
3 30
4 40
5 50

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Supply Curve Supply Curve refers to a graphical representation of supply schedule:

LAW OF SUPPLY Law of supply states the direct relationship between the price and quantity supplied keeping all other
factors constant (ceteris paribus).

We know, price is the dominant factor in determining supply of a commodity. As price of the commodity increases, there is more
supply of that commodity in the market and vice-versa. This behaviour of producers is studied under the law of supply.

Assumptions of Law of Supply Price of other goods is constant,State of technology is constant,Prices of factors of
production are constant,Taxation policy remains same,Goals of the producers remain same.

MOVEMENT ALONG THE SUPPLY CURVE (CHANGE IN QUANTITY SUPPLIED)

When quantity supplied of a commodity changes due to change in its own price, keeping other factors constant, it is known
as ‘change in quantity supplied’. It is graphical expressed as a movement along the same supply curve.

Expansion in Supply (Upward movement) Expansion in Supply refers to rise in the quantity supplied due to increase in
price of the commodity, other factors remaining constant.

● It leads to an upward movement along the same supply curve.It is also known as ‘Extension in Supply’ or ‘Increase in
Quantity Supplied’.

Price (in Rs.) Quantity (in units)

20 100
25 150
Contraction in Supply (Downward movement) Contraction in supply refers to a fall in the quantity supplied due to
decrease in price of the commodity, other factors remaining constant.

● It leads to downward movement along the same supply curve.It is also known as ‘Decrease in Quantity Supplied’.

Price (in Rs.) Quantity (in units)

20 100
15 70
SHIFT IN SUPPLY CURVE (CHANGE IN SUPPLY) A change in one of ‘other factors’ shifts the supply curve.

When supply of a commodity changes due to change in any factor other than the won price of the commodity, it is known
as ‘change in supply’. It is graphically expressed as a shift in the supply curve.

Various Reasons for Shift in Supply Curve : (i) Change in the price of other goods; (ii) Change in the price of factors of
production; (iii) Change in the state of technology; (iv) Change in taxation policy; (v) Change in objective of the firm; (vi)
Change in the number of firms; (vii) Future expectation of change in price.

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Increase in Supply (Rightward Shift). Increase in supply refers to a rise in the supply of a commodity caused due to any
factor other than the own price of the commodity.

Price (in Rs.) Supply (in units)

20 100
20 150
Decrease in Supply (Leftward Shift). Decrease in supply refers to a fall in the supply of a commodity caused due to any
factor other than the own price of the commodity.

Price (in Rs.) Supply (in units)

20 100
20 70

MOVEMENT ALONG SUPPLY CURVE VS SHIFT IN SUPPLY CURVE

Basic Change in qty supplied / Movement along Supply Change in supply / Shift in Supply Curve
Curve
Meaning When the quantity supplied changes due to change in When the supply changes due to change in oth
price, keeping other factors constant. factors, keeping price constant.
Effect on supply curve It leads to movement along the same supply curve. It leads to shift in supply curve.
Upward Movement / There is an upward movement along the same supply There is rightward shift in the supply curve a
Rightward shift curve as supply increases due to increase in own price supply increases due to favourable changes in
of the commodity. other factors.

Downward Movement / There is downward movement along the same supply There is leftward shift in the supply curve as
Leftward shift curve as supply decreases due to decrease in own price supply decreases due to unfavourable changes
of the commodity. other factors.

Due to increase or decrease in own price of the

Reason commodity Due to change in other factors. E.g change in
etc.

Diagram    

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EFFECT ON SUPPLY CURVE (DUE TO CHANGESIN OTHER FACTORS)

Changes in Prices of other Goods

The quantity supplied of the given commodity depends not only on its price, but also on the prices of other goods. ‘Increase’ and
‘Decrease’ in prices of other goods shifts the original supply curve of given commodity.

(i) Increase in Price of other goods: When prices of other goods rises, then production of such other goods become
more profitable in comparison to the given commodity. As a result, supply falls from OQ to OQ1 at the same price
OP. It leads to a leftward shift in the supply curve form SS to S1S1.
(ii) Decrease in Price of other goods: Fall in prices of other goods make production of the given commodity more
profitable and it increases its supply from QQ to QQ1 at the same price OP. It leads to a rightward shift in the
supply curve form SS to S1S1.

Change in Price of Factor of Production

(i) Increase in Price of Factors of Production: Rise in price of factors of production increase the cost of production
and reduces the profit margin. As a result, supply falls from OQ to OQ1 at the same price OP. It leads to a leftward
shift in supply curve from SS to S1S1.
(ii) Decrease in Price of Factors of Production: When price of factors of production falls, cost of production falls and
profit margin rises. It increases the supply from OQ to OQ1 at the same price OP. It leads to a rightward shift in the
supply curve SS to S1S1.

Change in the State of Technology

Technological changes affect the cost of production, which directly influences the supply of the commodity. Supply increase with
technological advancement, whereas any degradation of technology reduces the supply.

(i) Upgradation of Technology: Advanced and improved technology reduces the cost of production and raises the
profit margin. Supply rises from OQ to OQ1 at the same price OP. It leads to a rightward shift in the supply from
SS to S1S1.
(ii) Degradation of Technology: Technological degradation or complex and outdated technology leads to rise in cost of
production and fall in profit margin. It decreases the supply from OQ to OQ1 at the same price OP. As a result,
supply curve shift towards left from SS to S1S1.

CHANGE IN TAXATION POLICY

(i) Increase in Taxes: Rise in taxes increases the cost of production and reduces the profit margin. As a result supply falls
from OQ to OQ1 at the same price OP. It leads to leftward shift in the supply curve from SS to S1S1.
(ii) Decrease in Taxes: Fall in taxes decreases the cost of production and increases the profit margin. As a result supply rises
from OQ to OQ1 at the same price OP. It leads to rightward shift in the supply curve from SS to S1S1.

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 Reason for increase in Supply Reason for decrease in Supply

● Decrease in price of factors of production ● Increase in price of factors of production

● Decrease in price of other Goods
● Advanced and improved technology
● Decrease in taxes (favourable taxation policy)
● Increase in number of firms
● Goal of sales maximisation
● Expectation of future decrease in price
● Improvement in means of transportation
communication
● Increase in price of other Goods
● Outdated technology
● Increase in taxes (unfavourable taxation policy)
● Decrease in number of firms
● Goal of profit maximisation
● Expectation of future increase in price
and ● Poor means of transportation and communication

\PRICE ELASTICITY OF SUPPLY

Price elasticity of supply refers to degree to responsiveness of supply of a commodity with reference to change in the price
of such commodity.

KIND OF ELASTICTIES OF SUPPLY

1. Perfectly Elastic Supply (Es=∞) : When there is an infinite supply at a particular price and the supply becomes
zero with a slight fall in price, then supply of such a commodity is said to be perfectly elastic. In such a case E S = ∞ and
the supply curve is a horizontal straight line parallel to the X-axis

Price (in Rs.) Supply (in units)

30 100
30 200
30 300

2. Perfectly Inelastic Supply (Es=0) : When the supply does not change with change in price, then supply for such a
commodity is said to be perfectly inelastic. It must be noted that perfectly inelastic supply is an imaginary situation.

Price (in Rs.) Supply (in units)

20 20
30 20
40 20

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3. Highly Elastic Supply (Es ˃ 1) : When percentage change in quantity supplied is more than the percentage change
in price, then supply for such a commodity is said to be highly elastic.

Price (in Rs.) Supply (in units)

10 100
15 200

4. Less Elastic Supply (Es ˂ 1) : When percentage change in quantity supplied is less than the percentage change in
price, then supply for such a commodity is said to be less elastic.

Price (in Rs.) Supply (in units)

10 100
15 120

5. Unitary Elastic Supply (Es =1) : When percentage change in quantity supplied is equal to percentage change in
price, then supply for such a commodity is said to be unitary elastic.

Price (in Rs.) Supply (in units)

10 100
15 150

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METHODS FOR MEASURING PRICE ELASTICITY OF SUPPLY

Price elasticity of supply can be measured by the following methods:

1. Percentage Method
2. Geometric Method

Percentage Method

According to this method, elasticity is measured as the ratio of percentage change in the quantity supplied to percentage change in
the price.

ES = 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
, ES = ∆𝑄
∆𝑃
𝑥
𝑃
𝑄

Important observations

● Es will always have a positive sign.

● All supply curves which pass through origin will have Es = 1, irrespective of the angle it makes.
● Flatter the curve more is the elasticity at the point of intersection.

TIME PERIOD AND SUPPLY

1. Market Period (Very short period): Market period refers to a very short period in which the supply cannot be
changed in response to the change in demand.
2. Short Period: Short period refers to a period in which output (supply) can be changed by changing only variable
factors.
3. Long Period: Long period refers to a period in which output (supply) can be changed by changing all factors of
production.

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