LAW OF SUPPLY

SCHEDULE AND DIAGRAM

SUPPLY
 Definition

Quantity of product brought for sale at a price during a particular period of time.
 Basis

of Supply.

BASIS OF SUPPLY
Reservation Price  Cost of Production.  Nature of Product.  Need for money.  Expectation regarding future price.  Time required for varying supply.  Holding Capacity.  Warehousing Costs/Facilities.

DETERMINANTS OF SUPPLY
1. TECHNOLOGY.  The Way commodity is Produced.  New innovation of Products. Ex. Plastic :Due to various varieties of Plastic available results in decline in supply of many traditional products like Bamboo-Baskets.

DETERMINANTS OF SUPPLY
1. INPUT PRICES  Prices of raw material and factors of production

Pinput α 1/S

DETERMINANTS OF SUPPLY
1. GOVT. TAXES & SUBSIDIES.  Levy taxes on commodities includes Excise, Customs duty, Sales tax etc.  Indirect Taxes α Supply Ex. If excise is increased; the Producers realizes lower price from the given price in market.

DETERMINANTS OF SUPPLY
1. PRICE OF RELATED GOODS.

Price of Related commodities Y increases; Thus, Producer of X would tend to devote more resource to Production of Y and less in X; therefore supply of X at given price may fall.

DETERMINANTS OF SUPPLY
1. EXPECTATION ABOUT FUTURE. E α 1/S  If Producer expect higher price; they would tend to postpone its sale and reduce supply.  If they expect a fall in the Price of X; they would increase their current supply.

THE LAW OF SUPPLY
 Other

things remaining constant, there is a direct relationship between the quantity supplied of a commodity and its price.

QαP

THE SUPPLY SCHEDULE.

Changes in supply to changes in price. Ex: Supply of Mangoes in a local market.

Quantity Supplied (Kg/day) 100 120 140 160 180

Price (Rs/Kg) 6 7 8 9 10

THE SUPPLY CURVE
10 Price (Rs/Kg) 8 6 4 2 0 100 120 140 160 180

Quantity Supplied (Kg/day)

THE SUPPLY SCHEDULE.

Changes in supply to changes in price. Ex: Supply schedule of Product X

Price (Rs/Kg) 4 6 8 10 12

Supply (Kg) 400 800 1100 1300 1400

THE SUPPLY CURVE
14 12 10 8 6 4 2 0 400 800 1100 1300 1400 Price (Rs/Kg)

Supply (Kgs)

INDIVIDUAL & MARKET SUPPLY
Price (Rs.) 400 600 800 1000 1200 Market Supply (Quintals) A 4 8 11 13 14 B 3 6 8 10 11 C 5 9 12 15 20 D 6 10 15 20 30 Total 18 33 46 58 75

INDIVIDUAL & MARKET SUPPLY CURVE
1400 1200 1000 Price 800 600 400 200 0 0 20 40 Quantity 60 80
A B C D Md

LIMITATION OF LAW
 Prices

of other Products are Constant.

Ex.- Price of Jawar increases; its supply must increase. But If Prices of cotton rises further; farmer's would rather saw cotton than Jawar. And Supply of Jawar would fall.

LIMITATION OF LAW
 Cost

of Production are Constant. Even if Prices of product rise, If rise in the Production cost more than the gain; Supply would actually decline.

LIMITATION OF LAW
 State

of Technology is Constant. Technological process would bring down the cost of production with such progress, a slight fall in price may not detain producers to increase supply.

LIMITATION OF LAW
 Govt.

Tax-Policy is Constant Govt. Lowers Taxes on raw material or electricity, Cost of Production may go Down. Producer may increase production without reduction in Price.

SUPPLY CURVE AS DIVIDING LINE
P
(Rs/Kg)

Attainable region

S

8 7

Non-Attainable

120 140 160

Q
(Kg)

SUPPLY & DEMAND RELATION

Equilibrium Price. Disequilibrium Excess Supply Q2-Q1 Excess Demand Q2-Q1

P1


Equilibrium pt.

 

P1

Q1

Q2

INCREASE OF SUPPLY
Price Supply Supply 1 2 (Rs)
(Qtl.) (Qtl.)
Price 700 600 500 400 300 200 100 0

200 300 400 500 600

150 250 300 350 400

300 400 450 500 550

S1 S2

0

100

200

300 Quantity

400

500

600

•Decrease in cost of Production

EFFECT OF INCREASE OF SUPPLY
• Whatever the cause, the most likely effect will be that the price of the good will decrease and that more of the good will be sold.
P S0 S1 P0 P1 D Q0 Q1 Q

S ↑ => P ↓, Q ↑
• an increase of supply gets buyers to buy more of the good by lowering the price.

DECREASE OF SUPPLY
Price Supply Supply 1 2 (Rs)
(Qtl.) (Qtl.)
Price 700 600 500 400 300 200 100 0 0 100 200 300 Quantity 400 500 600 S1 S2

200 300 400 500 600

300 400 450 500 550

150 250 300 350 400

Increase in cost of Production

EFFECT OF DECREASE OF SUPPLY
• Whatever the cause of the decrease of supply, the most likely effect will be that the price of the good will increase and that less of the good will be sold. S ↓ => P ↑, Q ↓ • Decrease of supply gets buyers to buy less of the good by raising the price.
D Q1 Q0 Q P P1 P0 S1 S0