What Is Supply?

• Supply is a fundamental economic concept that describes the total

amount of a specific good or service that is available to consumers.
• Supply can relate to the amount available at a specific price or the
amount available across a range of prices if displayed on a graph.
• Supply means the quantities that a seller is willing and able to sell at
different prices. It is obvious that if the price goes up, he will offer
more for sale.
• But if the price goes down, he will be reluctant to sell and will offer to
sell less.
FEATURES OF SUPPLY 1. Supply is a desired quantity:
• It indicates only the willingness, i.e., how much the firm is willing to sell and
not how much it actually sells.
2. Supply of a commodity does not comprise the entire stock of the
commodity:
• It indicates the quantity that the firm is willing to bring into the market at a
particular price. For example, supply of TV by Samsung in the market is not
the total available stock of TV sets. It is the quantity, which Samsung is
willing to bring into the market for sale.
3. Supply is always expressed with reference to price:
• Just like demand, supply of a commodity is always at a price because with a
change in price, the quantity supplied may also change.
4. Supply is always with respect to a period of time:
• Supply is the quantity, which the firm is willing to supply during a specific
period of time (a day, a week, a month or a year).
Four Essential element of supply
• Quantity of a commodity
• Willingness to sell
• Price of a commodity
• Period of Time
INDIVIDUAL SUPPLY
SCHEDULE

A supply schedule is
a table or chart that
shows how much
product a company
will have to produce
at a certain price to
meet the demands of
customers. While a
supply curve shows
the graphic
correlation between
price
MARKET SUPPLY
SCHEDULE

Market supply
schedule refers to
supply schedule of all
the firms /producers
in the market
producing a
particular commodity
Determinants of supply
Supply is always changing due to a number of outside factors they are known as
determinants of supply
• Price of the good: If you work for a firm that decides to increase the price of a good,
the supply will also increase. This is because companies want to produce more
products at a higher profit, especially if there is an increase in demand.
• Number of suppliers in the market: The more companies producing the same
product, the higher the supply will become. In contrast, if the opportunity cost of
producing a good becomes too high, suppliers will leave the market, driving the
supply down.
• Taxes and subsidies: Taxes are always part of balancing the general ledger or figuring
financial equations such as return on investment (ROI). Depending on the state and
locality of your company, taxes can increase the cost of production, causing the
supply to fall. If taxes are cut, the supply increases. Subsidies are a set amount of
money given to a company by the government in a particular industry. This capital
helps them keep the price low, increase supply or compete with imported goods.
• Weather: Weather mostly affects those in the agricultural industry, but it can also
play a role in the production and supply of other goods. For example, a drought
• Related goods: If your company can produce products that are closely related,
you can move production to the product that you can make in large quantities.
For example, if your company makes laundry detergent and dish soap, you can
shift to making more dish soap when the price increases, meaning the supply of
laundry detergent decreases.
• Producer expectations and forecast: You might have to produce financial
forecasts and expectations for the coming year or quarter. These forecasts play a
massive role in supply. If these projections show an upcoming demand for a
product, your company might increase production to meet these expectations. If
the demand is falling, your company may decrease supply.
• Factors of production: Factors of production often fall in the blanket term
“overhead.” Increased costs of raw materials, union strikes, increased wages or a
change in the cost of utilities can cause supply to increase or decrease.
• Improvements in technology: Technology plays a vital role in demand, especially
in terms of automation or new production processes. For example, if you work for
a company that has an excellent research and development team, they might
discover new, more cost-effective ways to produce a good. This would cause an
increase in supply.
Law of Supply VALUABLE?

• Law of supply states that other factors remaining constant, price and
quantity supplied of a good are directly related to each other. In other
words, when the price paid by buyers for a good rises, then suppliers
increase the supply of that good in the market.
Price (in Rs) Quantity Supplied
5 100

10 200

15 300
Assumptions of the law of supply

No change in the income:

There should not be any change in the income of the purchaser or the seller.
2. No change in technique of production:
There should not be any change in the technique of production. This is essential for the
cost to remain unchanged. With the improvement in technique if the cost of production
is reduced, the seller would supply more even at falling prices.
3. There should be no change in transport cost:
It is assumed that transport facilities and transport costs are unchanged. Otherwise, a reduction in
transport cost implies lowering the cost of production, so that more would be supplied even at a lower
price.
4. Cost of production be unchanged:
It is assumed that the price of the product changes, but there is no change in the cost of production. If
the cost of production increases along with the rise in the price of product, the sellers will not find it
worthwhile to produce more and supply more. Therefore, the law of supply will be valid only if the cost
of production remains constant. It implies that the factor prices such as wages, interest, rent etc.,
are also unchanged.
There should be fixed scale of production
During a given period of time, it is assumed that the scale of
production is held constant. If there is a changing scale of
production the level of supply will change, irrespective of changes in
the price of the product.
The prices of other goods should remain constant:
Further, the law assumes that there are no changes in the prices of other
products. If the price of some other product rises faster than that of the product
in consideration, producers might transfer their resources to the other product—
which is more profit yielding due to rising prices. Under this situation and
circumstances, more of the product in consideration may not be supplied,
despite the rising prices.
Exceptions:
• Agriculture product
• Goods of social distinction
• Perishable goods
 Movement on supply curve
Extension
• If the prices increase, other factors kept
constant, there is an increase in the quantity
supplied which is referred to as an
expansion in supply. Graphically, this is
represented as an upward movement along
the same supply curve.
Contraction
• if the prices decrease, keeping other factors
constant, firms tend to decrease the supply.
This is referred to as a contraction in supply.
Graphically, this is represented as a
downward movement along the same
supply curve.
 Shift in supply curve
• Increase in supply
The factors other than price
affect the supply curve in a
different manner. These factors
cause the supply curve to shift.
Of course, this shift is also
categorized into two which are-
a leftward and rightward shift.
z
Decrease in supply in supply curve
• Increase in supply
Factors affecting the supply curve
1.A decrease in costs of production. This means business can supply
more at each price. Lower costs could be due to lower wages, lower
raw material costs
2.More firms. An increase in the number of producers will cause an
increase in supply.
3.Investment in capacity. Expansion in the capacity of existing firms,
e.g. building a new factory
4.The profitability of alternative products. If a farmer sees the price of
biofeuls increase, he may switch to growing crops for biofuels on all
his fields and this will lead to a fall in the supply of food, such as
wheat.
Factors affecting the supply curve
6. Related supply. If there is an increase in the supply of beef (from cows) then
there will also be an increase in the supply of leather.
7. Weather. Climatic conditions are very important for agricultural products
8. Productivity of workers. If workers become more motivated and work hard, then
there will be significant increase in output and supply.
9. Technological improvements. Improvements in technology, e.g. computers or
automation, reducing firms costs.
10. Lower taxes. Lower direct taxes (e.g. tobacco tax, VAT) reduce the cost of goods.
11. Government subsidies. Increase in government subsidies will also reduce the cost
of goods, e.g. train subsidies reduce the price of train tickets.
12. Objectives of firms. If firms are profit maximisers and collude with other firms,
we may see a fall in supply as they try to maximise profits. However, if they switch
to targeting sales or revenue maximisation, then we will see an increase in supply
Price elasticity of Supply
• The price elasticity of supply is the measure of the responsiveness in
quantity supplied to a change in price for a specific good.
• Elasticity is defined as a proportionate change in one variable over the
proportionate change in another variable:
Rs
Supply Curve
5
4
3
2
1
Forces of Demand and Supply

P2

E
P

P1

Q1 Q2
Q