As the term ‘demand’ refers to the quantity of a good or service that the consumers are willing and able to purchase at various prices during a period of time, the term ‘supply’ refers the amount of a good or service that the producers are willing and able to offer to the market at various prices during a period of time. Two important points apply to supply:
(i) The supply refers to what firms offer for sale, not neccessarily to what they succeed in selling.
(ii) Supply is a flow. The quantity supplied is so much per unit of time, per day, per week or per year.
Determinants of supply
Although price is an important consideration in determinig the willingness and desire to part with the commodities, there are many other factors which determine the supply of a product or a service. These are discussed below.
Price of the good: Other things being equal, the higher the relative price of a good the greater the quantity of it that will be supplied. This is because goods and services are produced by the firm in order to earn profits and profits rise if the price of its product rises.
Price of the related goods: If the prices of other goods rise, they become relatively more profitable to the firm to produce and sell than the good in question. It implies, that if the price of Y rises, the quantity supplied of X will fall. For example, if price of wheat rises, the farmers may shift lands to wheat production and away from rice.
Price of the factors of production: A rise in the price of a particular factor of production will cause an increase in the cost of making those goods that use a great deal of that factor than in the costs of producing those that use relatively small amount of the factor. For example, a rise in the cost of land will have a large effect on the cost of producing wheat and a very small effect on the cost of producing automoblies. Thus a change in the price of one factor of production will cause changes in the relative profitability of different lines of production and will cause producers to shift from one line to another and thus supplies of different commondities will change.
State of technology: The supply of a particular product depends upon the state of technology also. Inventions and innovations tend to make it possible to produce more or better goods with the same resources, and thus they tend to increase the quantity supplied of some products and to reduct the quantity supplied of products that are displaced.
Government Policy: The production of a good may be subject to the imposition of commodity taxes such as excise duty, sales tax and import duties. These raise the cost of production and so the quantity supplied of a good would increase only when its price in the market rises. Subsidies, on the other hand, reduce the cost of production and thus provides an incentive to the firm to increase supply.
Other Factors: The quantity supplied of a good also depends upon government’s industrial and foreign policies, goals of the firm, infrastructual facilities, market structure, natural factors etc.
Laws of Supply
The law of supply can be stated as: Other things remaining constant, the quantity of a good produced and offered for sale will increase as the price of the good rises and decrease as the price falls.
This law is based upon common sense, for the higher the price of the good, the greater the profits that can be earned and thus greater the incentives to produce the good and offer it for sale. The law is known to be correct in large number of cases. There is an exception however.
The behaviour of supply curve is also affected by the time taken into consideration. In the short run, it may not be easy to increase supply but in the long run supply can be easily adjusted in response to changes in price.
The law of supply can be explained through supply schedule and supply curve. Consider the following schedule.
Supply Schedule of Good A
Price (Rs.) Quantity supplied
(per kg) (kg)
1 5
2 35
3 45
4 55
5 65
The table shows the quantities of that would be produced and offered for sale at a number of alternative pries. At Re. 1, for example, 5 kilograms of good are offered for sale and at Rs. 3 per kg., 45 kg. would be forthcoming.
We can not plot the data from Table on a graph. In figure below price is plotted on vertical axis and quantity on the horizontal axis, and various price-quantity combinations of the schedule are plotted.
When we draw a smooth curve through the plotted points, what we get is the supply curve for good A. The curve shows the quantiy of A that will be offered for sale at each price of A. It slopes upwards towards right showing that as price increases, the supply of A increases and vice-versa.
The market supply curve for ‘A’ can be obtained by adding horizontally the various firms’ supply curves.
Shifts in the Supply Curve
When the supply curve bodily shifts towards right as a result of a change in one of the factors that influence the quantity supplied other then the commodity’s own price, we say there is an increase in supply. When these factors cause the supply curve to shift to left we call it decrease in supply as shown in figures ahead.
Movements of the supply curve
When the supply of a good increases as a result of an increase in its price we say that there is an increase in the quantity supplied and there is a upward movement on the supply curve. The reverse is the case when there is a fall in the price of the good.
Elasticity of supply
The elasticity of supply is defined as the responsiveness of the quantity supplied of a good to a change in its price. Elasticity of supply is measured by dividing the percentage change in quantity supplied of a good by the percentage change in its price i.e.
Where q denotes original quantity supplied.
Dq denotes change in quantity supplied.
p denotes original price.
Dp denotes change in price.
Type of Supply Elasticity
The elasticity of supply can be classified as under:
Perfectly Inelastic supply : If as a result of a change in price, the quantity supplied of a good remains unchanged, we say that the elasticity of supply is zero of the goods has perfectly inelastic supply. The vertical supply curve in figure shows that irrespective of the price change, the quantity supplied remains unchanged.
Relatively less-elastic supply: If as a result of a change in the price of a good its supply changes less than proportionately, we say that the good is relatively less elastic or elasticity of supply is less than one. Figure shows that the relative change in the quantity supplied (Dq) is less than the relative change in the price (Dp).
Relatively greater-elastic supply: If elasticity of supply is grater than one i.e. when the quantity supplied of a good changes substantially in response to a small change in the price of the good we say that supply in greatly elastic. Figure shows that the quantity supplied (Dq) is greater than the relative change in the price.
Unit-elastic: If the relative change in the quantity supplied is exactly equal to the relative change in the price, the supply is said to be unitary elastic. Here coefficient of elasticity of supply is equal to one. In Figure the relative change in the quantity supplied (Dq) is equal to the relative change in the price (Dp)
Perfectly elastic supply: The supply elasticity is infinite when nothing is supplied at a lower price but a small increase in price causes supply to rise from zero to an indefinitely large amount indicating that producers will supply any quantity demanded at that price. Figure shows infinitely elastic supply.
Factors affecting Elasticity of Supply
Following are the important factors which influence the elasticity of supply:
Nature of the commodity: Commodities which are perishable in nature have inelastic supply this is because their supply cannot be increase substantially as a result of a change in their prices. Durable goods on the other hand, generally, have elastic supply.
Time-factor: Longer the time period involved in the production of a commodity more is the time avaiable for changing the size of plant and making other cost adjustments and hence more elastic is the supply of the commodity. On the other hand, shorter the time period involved in production, more inelastic the supply of a commodity would be.
Technique of production: Supply of commodities involving simple production techniques have elastic supply and commodities having complex techniques of production have inelastic supply.
Future expectations: If the prices are expected to rise in future, prodcers will withhold the supply and hence elasticity will be inelastic. On the contrary if the prices are expected to fall in future, the supply will be elastic.
