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) Individual Supply Curve

(2) 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 OL 1 , when price rises from OP to
OP1.

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) Proportionate (or Percentage) Method

(ii) Geometric Method

(i) Proportionate Method:

According to this method, elasticity of supply (E S), is the ratio between

‘percentage change in quantity supplied’ and ‘percentage change in
price’ of the commodity.

Percentage Change in Quantity Supplied

ES =
Percentage Change in Price

Symbolically,

Q
100
Q Q P
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