Supply Concept

Page 1 (Business Economics) Complete Notes Course Code: DPS103-1
Unit 2: Demand & Supply (Market) Analysis:

Complete notes on Supply Concept
STEP 1: Concept of Supply, Law of Supply:
A) Supply is:
Desire of Producer/Supplier
Willingness to produce/supply
Backed by producing/Selling Capacity
Desire of producer to produce or to sell any commodity, at a given period of
time and price, backed by his producing and selling capacity.
B) SUPPLY FUNCTION:
QSX=f(Px)
TABLE:
Combination Price Qty supplied

A 1 5
B 2 8
C 3 12
From table (1), we can observe that as price of the commodity increases;
with other things remaining constant, quantity supplied also increases.
Plotting these combinations in fig (1) a supply curve is obtained, which is
upward sloped i.e. positive relationship between price & quantity supplied,
known as law of supply.
Note: The main reasons behind an upward sloping supply curve are :-
(i) Law of diminishing marginal productivity: -
The Law states that as more units of variable factor are employed, the
addition made to total production falls, i.e., cost of production rises. Thus,
more quantity is supplied only at higher prices so as to cover the rise in
cost of production.
(ii) Goal of profit maximisation:
The aim of producers is to maximise profits. The aim can be achieved by
raising price of the goods. At higher price producers increase supply of
goods.
STEP 2: Variations of Supply:
VARIATIONS IN SUPPLY
Change in quantity supplied implies changes along the same supply curve.
In fig 1, we have supply curve ‘SS’ - other things remaining constant, when
with increase in price quantity supplied of a commodity
increases, it is called ‘expansion of supply’ (movement
from a to b).
On the other hand, with ceteris paribus, decrease in
price leads to decrease in quantity supplied - it is known
as ‘contraction supply’ (movement from a to c). In
these cases, the responsible factor is price only.
Further change in supply implies shift in supply curves. In fig 2, we have
shift in supply curve towards horizontal, axis i.e., increase in supply, the
factors are other than price, like,
i) Improvement in technique of production.
ii) Fall in price of substitute goods. iii) Fall in cost of production. iv)
Favourable changes in govt policy. v) Fall in the expected price of the good.
Further decrease in supply takes place due to unfavourable changes in

factors other than its price. The factors are
i) Obsolete technique of production ii) Increase in price of substitute goods
iii) Increase in the cost of production. iv) Increase in the expected price of
the good. v) Unfavourable changes in govt policy.
As a whole, movement along a supply curve & shifts in the supply curve can
be obtained as follows:
STEP 3: Determinants of Supply
A) Determinants of Supply
1. Price of commodity x
2. Prices of other related commodities
3. Price of factor inputs -cost and production are inversely related
4. Supplies of factor inputs - supplies and production are directly related
5. Objective of producer –
a. profit maximization: high price, less quantity
b. sales maximization : low price , more quantity
6. Technological improvement
7. Expectation of future price changes
8. Non-economic factors such as rainfall, earthquakes, drought, industrial
disputes etc.
9. Govt policy
Step 4: EXCEPTIONS TO THE LAW OF SUPPLY

1. Perishable goods & Portraits & Paintings of Eminent Artists:
In this case irrespective of change in price supply remains unchanged.

The supply curve is vertical in nature.
2. Backward Bending supply curve:

In a labour surplus economy, it has been observed that after a certain
saturating point even though wage rates are offered more laborer will
substitute more leisure compared to hours spent.
Saturating point is at wage rate W2, after which supply curve violates Law of
Supply
3. Price expectation of seller

If the seller expects price to fall drastically in the near future
drastically, then at present,even with low price quantity sold will
increase.
4. Fear of being out of fashion

When seller thinks that goods are going to be outdated in near future
, he sells more even if at lower price.
5. Stock clearance sell

When seller wants to clear its old stock in order to store new goods,
he may sell large qty of goods at heavily discounted price
6. Auction sale
It takes place when the seller is in financial crisis and needs more
money at any cost and here the law of supply does not hold good.
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Page 1 (Business Economics) Complete Notes Course Code: DPS103-1

Unit 2: Demand & Supply (Market) Analysis:

STEP 1: Concept of Supply, Law of Supply:

Combination Price Qty supplied

STEP 2: Variations of Supply:

Further decrease in supply takes place due to unfavourable changes in

STEP 3: Determinants of Supply

Step 4: EXCEPTIONS TO THE LAW OF SUPPLY

In this case irrespective of change in price supply remains unchanged.

2. Backward Bending supply curve:

3. Price expectation of seller

4. Fear of being out of fashion

5. Stock clearance sell

he may sell large qty of goods at heavily discounted price

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