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SUPPLY

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					                                  SUPPLY
Meaning: It refers to quantity of commodity offered for sale at different possible prices at a point of
time.

Definition: According to Thomas,’ the supply of goods is the quantity offered for the sale in the given
market at a given time at various markets.

Distinction between stock and supply:

Stock of the commodity refers to the total quantity of that commodity which at any given time is
available in the market with the seller. Supply refers to that part of stock that the seller is ready to sell at
a given price and at a given time.

Distinction between supply and quantity supplied:

Supply refers to the whole supply schedule, while quantity supplied refers to a specific quantity ( within
the schedule) offered for sale at a given time.

Individual supply and market supply

Individual supply refers to supply of a commodity by an individual firm in the market. On the other hand,
market supply refers to supply of a commodity by all the firms in the market producing/ selling that
commodity. For example, If at a given price, firm ‘A’ is willing to sell 100 units of a commodity and firm
‘B’ is willing to sell 200 units. And if there are only two firms producing this particular commodity,
market supply (also called industry’s supply) will be 300.



Supply function OR factor Affecting supply of a commodity.

Supply function studies the functional relationship between supply of a commodity and its various
determinants. Supply of the commodity depends upon following factors:

    1)   Price of the commodity ( Px)
    2)   Goal of the firm (G)
    3)   Price of other goods (Po)
    4)   Number of the firm (Nf)
    5)   Price of factors of production (PF)
    6)   Change in technology (T)
    7)   Expected Future price (EX)
    8)   Govt. policy (GP)
 The above factors are expressed in the form of following equation.

           Sx = f ( Px , PO, NF, G , PF, T, EX, GP)



Now in detail:

1) Price of the commodity: There is a direct relationship between price of the
   commodity and its quantity supplied. Generally higher the price, higher the supply
   and vice versa.
2) Goal of the firm: If the goal of the firm is to maximum profits,
3) Price of the other goods: The supply of the commodity is depend upon the prices of
   other goods. An increase in the price of other goods makes them more profitable for
   the firms. They will increase the supply and vice- versa.
4) Number of the firms: market supply is also depends upon the number of firm in the
   market. Increase in the number of firms implies more supply and vice versa.
5) Price of factors of production: supply of the commodity is also affected by the price
   of factors used for the production of the commodity. If the factor price decreases,
   cost of the production also reduces, accordingly supply increases and vice versa.
6) Change in technology: change in technology is also affects supply of the commodity.
   Improvement in the technology of production reduces cost of production.
   Consequently, profit tends 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 and vice versa.
8) Govt. policy: ‘Taxation and subsidy’ policy of the govt. also affects market supply of
   the commodity. Increase in the taxation tends to reduce the supply, while subsidies
   tend to induce greater supply of the commodity.
                           CHANGE IN SUPPLY



         Change in                                    Change in supply
         quantity supply


   When due to change in the price            When quantity supplied change
   of the commodity, its quantity             due to change in the factors other
   supplied changes, it is called             than price of the commodity such
   change in quantity in supply. It is        as change in technology, change in
   also called movement along with            input price, is increase or decrease
   supply curve                               in supply.




 Increase in              Decrease in       Supply falls due      Supply rises
 the quantity             the quantity      to change in          due to change
 supplied of a            supplied of a     other factors         in other factors
 commodity                commodity         other than price      other than
 due to rise in           due to fall in                          price
 price is called          price is called




EXTENSION IN             CONTRACTION        Increase in           Decrease in
SUPPLY                   IN SUPPLY          supply                supply




           LAW OF SUPPLY                           Increase or decrease
                                                   in supply
LAWOF SUPPLY:

Law of supply states that. Other things remain constant, there is a positive relationship between price of
the commodity and its quantity supplied. Thus more is supplied at the higher price and less at the lower
price. In other words, there is positive relation between price of the commodity and its quantity
supplied.

Explaination:

                                        Law of supply


\
                   Extension in                               Contraction in
                   supply                                     supply



Extension in supply: Other thing being equal, when quantity supplied of a commodity increases due
to rise in its price, it is called EXTENSION IN SUPPLY. It is shown by following table and curve:

                                   Table. Supply schedule


                   Price of the commodity                   supply

                               1                               1
                               2                               2



In the above table, it is shown that when price is Rs. 1 the quantity supplied is of 1 unit. When price rises
to Rs. 5 the supply extend to 5 unit.

Supply curve: Graphical presentation of supply schedule is called supply curve. Supply curve (SS) slpos
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.
Contraction in supply: Other thing being equal, when quantity supplied of a commodity decreases
due to falls in its price, it is called CONTRACTION IN SUPPLY. It is shown by following table and curve:


                                   Table. Supply schedule


                   Price of the commodity                   supply

                      5                                      5

                      1                                       1


In the above table, it is shown that when price is Rs. 5 the quantity supplied is of 5 unit. When price
reduce to Rs. 1 the supply contract to 1 unit.

 Supply curve (SS) slpos downwards and shows decrease in quantity supplied in response to decrease in
price of the commodity. Thus, quantity supplied red fromuced OL1 to OL , when price reduce from OP1
to OP.
 Assumptions of law of supply

   1)   There is no change in price of the factors of production
   2)   There is no change in the technology of production
   3)   There is no change in the goal of firm
   4)   There is no change in the price of related goods
   5)   Producers do not expect change in the price of the commodity in the future.

Exception of law of supply

The positive relationship between price of the commodity and its quantity supplied of the commodity
may not hold good, or may not firmly hold good in certain situation, as under:

   1) The law of supply does not apply to agriculture products whose supply is controlled by natural
      factors.
   2) Supply of goods having social distinction will remain limited even if their price may rise high.
   3) Sellers may be willing to sell more units of perishable goods although their price may be falling.




Increase in supply or decrease in supply

When supply of a commodity change due to factors other than its own price of the commodity,
such as change in expectation, change in technology, change in the price of inputs of
production then it is called increase or decrease in supply. such changes are represented by
forward and backward shift in supply curve.

   1) Increase in supply: increase in supply is a situation when firm are willing to supply more
      of a commodity at the existing price. This is explain by following table and curve:

                            Table, increase in supply
                             Price                 supply

                              10                   10

                              10                   20
The above table shows that initially, 10 units of the commodity are supplied at the price of Rs.
10 per unit. Due to some causes now firms are willing to supply 20 units even when the price
remain to be Rs.10. this is shown by following diagram.




The above curve implies a forward shift in the supply curve as from S1 to S2. It represent supply
increase from 10 to 20 at the same price Rs.10.

Causes of increases in supply

   1)   Improvement in technology
   2)   Reduction in the price of factor inputs
   3)   When price of the competing goods decrease
   4)   Increase in number of firm in the market
   5)   When the firm expect a fall in price in future
   6)   When the goal fo the firm shift from profit maximization to sale maximization



   2) Increase in supply: Decrease in supply is a situation when firm are willing to supply less
      of a commodity at the existing price. This is explain by following table and curve:

                          Table, increase in supply
                            Price               supply

                            10                  10

                            10                  5
The above table shows that initially, 10 units of the commodity are supplied at the price of Rs.
10 per unit. Due to some causes now firms are willing to supply 5 units even when the price
remain to be Rs.10. this is shown by following diagram.




The above curve implies a backward shift in the supply curve as from S2 to S1. It represent
supply decrease from 20 to 5units at the same price Rs.10.

Causes of decrease in supply

   1)   when technology become obsolete
   2)   increase in the price of factor inputs
   3)   When price of the competing goods increase
   4)   Decrease in number of firm in the market
   5)   When the firm expect a rise in price in future
   6)   When the goal of the firm shift from sale maximization to profit maximization
       Important questions ( read carefully)



How does change in technology affect supply curve:

                                                          Technology improve tends to lower the
                                                          MC and AC of the production.
                                                          Accordingly, producers should be willing
                                                          to supply more at the exiting price. This
                                                          implies a forward shift in supply curve.

                                                          Initially, PK quantity was supplied at
                                                          price OP. after technology
                                                          improvement, PT quantity is supplied at
                                                          the same price. It is the situation of
                                                          increase in supply.



How does change in input prices affect supply curve:


                                                                     Supply curve
                                                                     shift forward in
                                                                     case of decrease
                                                                     in input price.




                                                                      Supply curve shift
                                                                      backward in case of
                                                                      increase in input
                                                                      price.




       Input prices may increase or decrease. In case of increase in the input prices, MC and AC
cost tends to rise. Accordingly, producers should be willing to supply less at the existing prices.
This situation implies a situation of backward shift in supply curve or decrease in supply.on the
other hand, if the input prices tend to fall, MC and AC cost of the production would decline.
Accordingly, producers should be willing to sell more at the existing prices. This implies a
situation of forward shift in supply curve.

       When price of inputs increase then supply curve shift from S2 TO S1

       When price of input decrease then supply curve shift from S2 TO S3




How does change in input prices affect supply curve:


Supply curves in different market:

Very short time: it is the market period of time during which production cannot be changed at
all. Accordingly supply can be increased upto the existing stock.




       In the above curve SS is a vertical supply curve which indicates inelastic supply.

Supply curve under short time: it is a period of time when output can be increased by using
more and more variable factors, whereas fixed factors of production like plant and machinery
cannot be changed. Accordingly supply can increased but upto the capacity of fixed factors.
Supply curve under long time: long time is a period of time when all the factors of production
can be changed. In this time supply curve much more responsive to the change in price level (
as compare to short time)
A

				
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posted:10/23/2011
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