Chapter – 9

Supply
SUPPLY - Quantity of a commodity that a producer is willing and able to offer for sale in the
market at a specific price over a given period of time.

DIFFERENCE BETWEEN STOCK AND SUPPLY

Basis Stock Supply

Supply for a commodity refers to the

Stock refers to the total quantity of quantity of a commodity that a
Meaning goods available with the producer at producer is willing and able to offer
a particular point of time for sale in the market at a specific
price over a given period of time.

Time It can be measured at a particular

It is measured over a period of time
Dimension point of time.

Related to Stock is related to production. Supply is related to stock.

Occurrence It comes before supply. Supply comes after Stock.

Stock is always greater than or equal Supply is always less than or equal
Scope
to supply. to stock.

TYPES OF SUPPLY
There are two types of supply:-

1. Individual Supply
Individual supply refers to the quantity of a commodity that a single producer is willing and able
to offer for sale in the market at a specific price over a given period of time.

2. Market Supply
Market supply refers to the quantity of a commodity that all the producers are willing and able to
offer for sale in the market at a specific price over a given period of time.

FACTORS AFFECTING INDIVIDUAL SUPPLY (G2 - TRIP)

1. Price of the commodity

There is a direct relationship between price of the
commodity and quantity supply i.e., with rise in the
price, the profit margins of the producer will increase, so
he will supply more and with fall in the price, the profit
margins of the producer will decrease, so he will supply
less. There is a direct relationship between price of the
commodity and quantity supplied.

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2. Input Prices (Price of Factors of Production)

It refers to the money paid by the firm to the factors of production for using their services. If
input prices increase, the profit margin of a producer decreases, and hence his supply
decreases and if input prices decrease, the profit margin of a producer increases, and hence
his supply will also increases.

3. Prices of related goods

Related goods are those goods that are related to our commodity. If the price of related goods
increases, the producer will shift himself to that good as it becomes more profitable for him
and the supply for our good will decrease and if the price of related goods decreases, other
producer will shift themself to our good as it becomes more profitable for them and the
supply for our good will increase.

4. Technology
If a producer is using advanced technology, his costs of production will decreases and profit
margin increases and hence, his supply also increases whereas if he uses out-dated
technology, his profit margin decreases and cost of production increases so his supply also
decreases.

5. Government Policy
If the government policies are favourable to the firms, like decrease in taxes, increase in
subsidies, etc., the producer would increase the supply and if the government policies are
unfavourable to the firms, like increase in taxes, decrease in subsidies, etc., the producer
would decrease the supply.
For e.g.: If taxes on the commodities increase, the profit margin of the producer decreases so
his supply also decreases and vice versa.

6. Goals of the firm

If the goal of the firm is profit maximisation, he will supply more only at higher prices. But if
his goal is sales maximisation he will supply even at existing prices.

FACTORS AFFECTING MARKET SUPPLY (FIN)

Along with factors affecting individual supply, some few other factors also affects the market
supply:-

1. Number of firms
If the number of firms in the market increases, market supply will increase and if the number
of firms in the market decreases, the market supply will also decrease.

2. Means of transport and communication. (Infrastructure)

With good transport and communication facilities market supply will increase whereas poor
transport and communication reduces the supply in the market.

3. Future expectation of price

If the producers expect a rise in the future price of the commodity, the current supply will
decrease as they will supply more in future at higher prices and if the producers expect a fall
in the future price of the commodity, the current supply will increase as the profit will reduce
in future.

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SUPPLY FUNCTION
It refers to the functional relationship between supply and factors affecting supply.
Quantity supplied = f (G1 G2 TRI1P FI2N)

→ Individual Supply Function

It refers to the functional relationship between individual supply and factors affecting supply.
Quantity supplied = f (G1 G2 TRIP)

→ Market Supply Function

It refers to the functional relationship between market supply and factors affecting supply.
Quantity supplied = f (G1 G2 TRI1P FI2N)

SUPPLY SCHEDULE
It refers to a tabular statement that shows different quantities of a commodity being supplied at
different prices.
Supply by Supply by Market
Price
Producer A Producer B Supply
10 100 50 150
20 200 60 260
30 300 70 370
40 400 80 480

SUPPLY CURVE
It refers to the graphical representation of the supply schedule.

NOTE - Market supply curve is flatter than individual supply curve because it is the sum of all
the individual supply curves and changes in individual is faster than totality.
Hence individual supply curve is flatter than market supply curve.

SLOPE OF SUPPLY CURVE

Slope of supply curve refers to the ratio of change in price to change in quantity supplied.
It shows that change in the quantity supplied due to change in its price.

Slope = ∆Price
∆Quantity

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MOVEMENT ALONG THE SUPPLY CURVE (Change in Quantity Supplied)

It refers to a situation where quantity supplied of a commodity changes due to change in its
price, other factors remaining constant.
• Movement takes place on a single supply curve and it follows the law of supply.

Movement can be of two types:-

1. Expansion
→ It refers to a situation where the quantity supplied increases due to rise in the price of the
commodity.
→ It is indicated by upward movement along the supply curve.
→ It is also known as extension or increase in quantity supplied.

2. Contraction
→ It refers to a situation where the quantity supplied decreases due to fall in the price of the
commodity.
→ It is indicated by downward movement along the supply curve.
→ It is also known as decrease in quantity supplied.

Price Quantity Situation

22 75 Expansion/
Extension

16 55

12 45 Contraction

SHIFT IN THE SUPPLY CURVE (Change in Supply)

It refers to a situation where the quantity supplied of a commodity changes due to change in
factors other than price of the commodity.
• Shift takes place on a separate supply curve and it violates law of supply.

Shift can be of two types:-

1. Increase in Supply
→ It refers to a situation in which quantity supplied increases due to change in the favourable
factors like fall in taxes, Fall in input prices etc.
→ It is indicated by a rightward shift in the supply curve.

2. Decrease in Supply
→ It refers to a situation in which quantity supplied decreases due to change in the
unfavourable factors like rise in input prices, rise in taxes etc.
→ It is indicated by the leftward shift in the supply curve.

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Price Quantity Situation

10 75 Increase in
Supply

10 55

Decrease in
10 40
Supply

PRICE ELASTICITY OF SUPPLY

Price elasticity refers to the degree of responsiveness of change in quantity supplied due to
change in price of the commodity.

It refers to the ratio of percentage change in quantity supplied to percentage in price of the
commodity.

ED = % Change in Quantity Supplied

% Change in Price

ED = ∆Q/Q * 100
∆P/P * 100

ED = ∆Q * P
∆P Q

where,
∆Q = New Quantity – Old Quantity
∆P = New Price – Old Price

DEGREES OF ELASTICITY OF SUPPLY

There are various degrees of elasticity of supply. Some of them are as follows:

1. Unitary Elastic Supply (ES = 1)

When the percentage change in quantity supplied of the
commodity is equal to percentage change in price of the
commodity, the supply is said to be unitary elastic supply.
It passes through the origin.

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2. High Elastic Supply (ES > 1)

When the percentage change in quantity supplied of the
commodity is more than percentage change in price of the
commodity, the supply is said to be high elastic supply.

3. Less Elastic Supply (Inelastic supply) (ES < 1)

When the percentage change in quantity supplied of the
commodity is less than percentage change in price of the
commodity, the supply is said to be less elastic supply.

4. Perfectly Elastic Supply (ES = ∞)

When the quantity supply changes, even when there is no
change or a slight change in the price of the commodity, the
supply is said to be perfectly elastic supply.

5. Perfectly Inelastic Supply (ES = 0)

When there is no change in quantity supplied of the commodity,
even if there is a change in price of the commodity, the supply is
said to be perfectly inelastic supply.

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LAW OF SUPPLY
Statement - It states that there is a direct relationship between price of the commodity and
quantity demanded, other factors remaining constant (citrus paribus).

Assumptions
→ There should be no change in the input prices.
→ There should be no change in price of related goods.
→ There should be no change in technology.
→ There should be no change in goals of the firm.

Table and Diagram

Quantity
Price
Supplied
10 100

20 200

30 300

40 400

Explanation
From the above table and diagram, it can be seen that as the price of the commodity increases
from Rs. 10 to Rs. 15, quantity supplied also increase from 100 to 200 units. This shows that
there is a direct relationship between price of the commodity and quantity supplied which can be
seen in the form of an upward sloping supply curve.

Conclusion
From the above explanation it can be concluded that supply rises as price rises & vice versa.

REASONS FOR LOW OF SUPPLY

1. Profit Motive
With rise in the price of the commodity the profit margins of the producer increases as a
result of which they supply more of that commodity.

2. Change in the Number of Firms

With rise in the price, the profit margin of the producer increases. This induces the new firms
to enter the market as a result of which the supply increases.

3. Change in Stock
With rise in the price of the commodity, profit margin on that commodity increases. Many
producers in the market supply their goods from their stock due to which supply in the
market increases.

EXPECTATIONS TO LAW OF SUPPLY

1. Rare Articles
Certain articles are part of rare articles like Mona Lisa painting, antiques, limited edition cars
are limited in number. The supply of these articles cannot be increased even after rise in
their prices.

2. Agriculture Goods
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These are those goods whose production is dependent on climate conditions the supply of
these goods cannot be increased even after rise in their prices.

3. Perishable Goods
These are those goods that cannot be stored for a longer period of time for e.g. fruits,
vegetables etc. Hence, they are supplied even at lower prices.

4. Backward Countries
Many countries in the world are financially backward i.e. they lack funds the supply of goods
of these countries cannot be increased even after rise in their prices as they lack money for
production.

5. Future Expectation Of Price

In certain situation, when a production expects fall in the future price of the commodity, he
may supply the good even at current lower prices which becomes an exceptional case.

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