- Supply analysis and law of supply

 Supply means the amount offered for sale at

a given price during a given period of time
 Like demand supply , is always related with
price and time
 According to THOMAS, the supply of goods is
the quantity offered for sale in a given
market at a given time at various places
 Stock is the total volume of a commodity in
existence which is kept ready in godowns at
a certain time
 Total amount of a commodity which can be
bought into the market for sale at a short
notice
 Not necessary that all the stock will be
offered for sale at a given time
 Functional relationship between supply of a
commodity and its various determinants

 S=f(P, PR, K,N,etc)

 Price of product, price of other good, price
of factor inputs, technical , number of
suppliers, government policy )
 The price of the commodity :

 Higher the price, higher will be the quantity

offered and vice- versa
 Price of related goods :
 If the price of the substitute will rise, more
resources will be diverted to produce that
good
 Ex: if prices of tea rises, land shall be used
for the cultivation of tea rather than coffee
supply of coffee will fall ,
 Supply of a commodity fall, when the price
of that substitute will rise
 Cost of production or prices of factor inputs :
 Is there is an increase in cost of production
due to rise in prices of an input like raw
material and intermediate goods, supply of
that good will fall
 And vice versa
 Improved technology :
 Improvement in techniques of production,
lowers the cost of production technical know
how improvement will raise the productivity
of factors of production , in turn will rise the
supply of a commodity
 Means of production and communication :
 Improvement in means of production and
communication will increase the supply of a
commodity
 In case of short supply, goods can be easily
rushed to the deficit area
 Goals and objectives of a firm :
 Maximize sales or revenues rather than
profits , supply will increase
 Number of seller :
 Entry of more seller will increase overall
supply of a commodity and exit will decrease
 Price expectations : future fall in price will
reduce the supply in price
 Political disturbances: political disturbances
or wars will reduce the supply and create
scarcity of the goods
 Taxation and subsidies : Taxes on output ,
sales or imports will reduce the supply of a
commodity
 Government policy : reduction in quotes and
tariff on foreign goods will open up the
market to foreign producers and will be tend
to increase the supply
 Showing the relationship between different
prices and supply of a particular product in a
particular market in a particular day at a
particular price
 Individual demand schedule
 Market demand schedule
 Graphic representation of a supply schedule
 Curve will show various quantities a producer
is willing to sell at various prices
 Slope upwards shows, producers willingness
to supply higher amount of commodity at a
higher price
 Individual supply curve
 Market supply curve
 Law of supply is the reverse of law of
demand

 Other things remaining the same, when price

increases , supply extends and when price
falls , supply contracts
 Direct relationship :
 Direct and positive relationship between
price and supply of a commodity,
 Other things remaining the same , higher
quantity will be supplied at a higher price
and vice versa
 No proportional relationship :
 It’s not necessary that supply will double if
the price of a commodity will be doubled , it
can increase by half or so
 Higher supply :
 When prices rises, sellers are willing to sell
more , higher prices will cause higher profits
which in turn will encourage higher
production
 Existing producers will also increase their
output
 Total supply in the market will increase
 Lower supply :
 When price fall , sellers are not willing to
release much from their stock
 Lower price will act as a disincentive and will
reduce the supply
 Price of the substitute will remain the same
 Price expectations are constant
 Method of production and technology remain
the same
 Number of firms will remain the same
 Cost of production will remain the same
 Natural factors will remain the same
 Price expectations : sellers fear that the
price in future will fall , they resort to panic
selling – selling high at lower price and vice
versa
 Agriculture produce : agriculture products
supply are governed by weatheric factor ,
 Due to natural calamity , food grains
production will fall
 Rare painting: supply is more or less fixed ,
and will not vary with the changes in price

 Perishable goods : seller will sell more

although the price may fall
 Auction and clearance sales: In case of
clearance sale, supply is increased at
reduced prices
 Expansion of supply – contraction of supply
(movement along a supply curve)

 Increase in supply- decrease in supply(shifts

in supply curve)
 Expansion of supply- other things remaining
the same when supply of a commodity rises
with increase in price

 Contraction of supply- when supply

decreases due to fall in price, other things
remaining the same
 Increase in supply -= when supply increases
due to factors other than the price of a
commodity

 Same price, more supply

 Less price, same supply
 Decrease in supply = when supply decreases
due to any factor other than price,

 Same price, less supply

 More price, same supply
 Responsiveness of the sellers to change in
the price of a commodity
 Reaction of the sellers to change in price of a
commodity

 Elasticity of supply , is the measure of

change in supply due to change in price
 Elasticity of supply is the ratio of percentage
change in quantity supplied over the
percentage change in price.

 Elasticity of supply measures the rate at

which the supply of a commodity changes as
a result to change in its price
 Perfect elastic demand :

 Supply may change to any extent, without

the change in price..

 Elasticity is infinity
 Perfectly inelastic supply :

 When a change in price causes no change in

supply,

 Elasticity is 0
 Unitary elastic supply :
 when change in amount supplied is in exact
proportion to a change in price.

 Elasticity = 1
 More elastic supply :

 When a small change in price brings about a

large change in quantity supplied
 A small rise in price leads to a great fall in
supply

 Es> 1
 Less elastic supply :
 When a big change in price brings small
change in quantity supplied

 Es<1
 Nature of the commodity
 Eg: perishable goods : supply does not
respond to change in price
 Supply is inelastic

 Cost of production :
 Increasing cost make supply of goods
inelastic
 Decreasing cost make supply of goods elastic
 Estimates of future prices:
 If future price will increase, producers will
hold on the supply and may not make the
product available in the market
 Supply in such situation will become inelastic

 Technique of production: if production

involves simple technique of production,
elasticity will become elastic
 if Production is cumbersome , complex
elasticity will become inelastic
 Time : the longer the period of time the
more elastic is the supply
 Lesser the period lesser will be the elasticity
of supply
 Very short period: supply is perfectly
inelastic
 Short time: relatively more elastic
 Long period: supply become more elastic
 Nature of inputs : if the production of a
commodity uses inputs that are commonly
used to produce those goods , it will tend to
be more elastic

 If uses specialized inputs, supply will be

relatively inelastic
 Price determination and elasticity of supply :
in market period (say very short period) since
supply is inelastic , demand plays an active
role in determination of price

 While in long run , supply is more elastic , it

will play an active role in price
determination
 Taxation and elasticity of demand :

 Useful for finance minister, it tells finance

minister that high taxes should be levied on
those goods whose supply is inelastic

 On contrary, supply of a commodity is

elastic, less tax should be imposed