CHAPTER NO: 04

“THEORY OF SUPPLY” By Mr. Farhad Ali

LECTURE OBJECTIVES
The meaning of Supply.
The Law of Supply
Movement VS Shift in Supply
Determinants of Supply
Backward Bending Supply Curve
THE MEANING OF SUPPLY
Supply of scare goods. It is the amount of commodity that sellers are able and
willing to offer for sale at different prices per unit of time.
In other words of Meyer “Supply is schedule of the amount of a good that would
be offered for sale at all possible prices at any period of time. e.g, day, week and
so on.” (source: Economics Books)
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. This relates closely to the demand for a good or
service at a specific price; all else being equal, the supply provided by producers
will rise if the price rises because all firms look to maximize profits. (Source:
Investopedia)
In economics, supply is the amount of something that firms, consumers, laborers,
providers of financial assets, or other economic agents are willing to provide to the
marketplace. Supply is often plotted graphically with the quantity provided
(the dependent variable) plotted horizontally and the price (the independent
variable) plotted vertically. (Source: Wikipedia)
DISTINCTION BETWEEN
STOCK AND SUPPLY
Supply refers to that quantity commodity which is actually brought
into the market for sale at a given price per unit of time. While stock
is meant the total quantity of a commodity which exists in a market,
and can be offered for sale at a short notice.
Supply and stock may or may not be equal, if the commodity is
perishable like fruits, vegetables and meat etc, than the supply and
the stock is generally the same. But in case of product which is
storable, the position is quite different. If the producer finds that the
price of his product is low as compared to its cost of production. He
tries to hold part or entire of the stock, in the case of favorable price,
the producer may dispose off larger quantities or the entire stock of
his commodity, it will all depend upon his own valuation of the
commodity at that particular time.
THE LAW OF SUPPLY
There is positive and direct relationship between price of
good and quantity offered for sale over a specified period of
time. When the price of good rise other things remain same,
but the quantity offered for sale increase and as price fall, the
amount available for sale decrease. This relationship between
prices and the quantities which supplier are prepared to offer
for sale is called The Law of supply.
Graph representation:
 MARKET SUPPLY
SCHEDULE:
Px 4 3 2 1

Q xS 100 80 60 40

In the table above, the producer are able and

willing to offer for sale 100 units of a
commodity at price of $4. As the price falls,
the quantity offered for sale decreases. At
price of $1, the quantity offered for sale is
only 40 units.
In the figure (5.1) price is plotted on the vertical axis
OY and the quantity supplied on the horizontal axis
OX. The four points d, c, b, and a show each price
quantity combination. The supply curve SS/ slopes
upward from left to right indicating that less
quantity is offered for sale at lower price and more
at higher prices by the sellers not supply curve is
usually positively sloped.
 MOVEMENT VS SHIFT IN
SUPPLY
MOVEMENT IN SUPPLY…
While explaining the law of supply we have stated that as price rise,
the quantity supplied increases and as price falls the quantity supplied
decrease and as price provided other things remain the same. This
change in the quantity supplied of a commodity is a movement of
one price quantity combination to another on the same supply curve.
Such a movement at varying prices is now illustrated with the help of
the supply curve given in figure.
In the above figure (5.2) at price "aT" ($3.00), "aT" 50
units quantity is supplied. When price rises to
dL ($7.0), the quantity supplied by the
producers increases to OL (110 units).
The change in quantity supplied at
varying prices is referred as movement…
SHIFTS IN SUPPLY
CURVE:
Shifts in supply curve means changes in supply. While
explaining the law of supply, we have stated that other
things remaining the same, the amount of the commodity
offered for sale increases with the rise in price and decreases
with a fall in price. When there is an increase in supply due to
one or more than one non-price factor (which was held
constant) such as production techniques, resource prices,
changes in the price of other commodities, etc., there is a
rise in supply. The entire supply curve shifts to the right of
original supply curve indicating that more quantity is offered
for sale at the same price per time period.
If due to one or a combination of non-price factors, less
quantity is brought into the market for sale at each price, the
supply is said to have fallen. In case of fall in supply, the
 SCHEDULE OF SHIFTS IN SUPPLY CURVE:
SUPPLY SCHEDULE OF SHIFTS:
Price per Original Rise in supply Fall in supply
shirt quantity
(Dollars ) Supplied per
Week

50 200 320 140

40 160 200 100
30 100 150 70
20 39 100 15
CONT..
In the figures (5.3) SS/ in the original supply curve S2S2 to the right
of the original supply curve shows an increase in the quantity
supplied at each price. S3S3 supply curve to the left of original
supply curve to the left of original supply curve indicates a
decrease in supply at each price over a specified period of time.
DETERMINANTS OF SUPPLY
The rise and fall in supply may take place on account
of various factors:
Change in Factor Prices: The rise or fall in supply may take
place due to changes in the cost of production of a
commodity. If the prices of various factor of production used
in the production of a particular commodity increase of it total
cost of production. There will be reduction in the supply of
that commodity at each price because the amount demanded
decreases with a rise in price. Conversely, if the prices of the
various factors of production fall down, it will result in
lowering the cost of production and so an increase in the
supply on varying prices.
CONT..
Change in Techniques: The supply of a commodity may also
be affected by progress in technique. If an improvement in
technique takes place in a particular industry, it will help in
reducing its cost of production. This will result in greater
production and so an increase in the supply of the
commodity. The supply curve will shifts to the right of the
original supply curve.
Improvement in means of Transport: The supply of the
commodity may also increase due to improvement in the
means of communication and transport. If the means of
transport are cheep and fast, then supply of the commodity
can be increased at a short notice at lower price.
Climate Change in case of Agriculture Products: The supply
of agricultural products is directly affected by the weather
conditions and the use of the better methods of production. If
rain is timely plentiful well-distributed; and improve methods
of cultivation are employed then other things remaining the
CONT..
Political Changes: The increase or decrease in supply may also place
due to political disturbances in a country. If country wages wars against
another country or some kind of political disturbances take place just
as we had at the time of partition, then the channels of production are
disorganized. It results in the decrease of certain goods the supply
curve shifts to the left of originals curve.
Taxation Policy: If a government levies heavy taxes on the import of
particular commodities, then the supply of these commodities is
reduced at each price. The supply curve shifts to the left .conversely if
the taxes on output in the country are low and government encourages
the import of foreign commodities, then the supply can be increased
easily. The supply curve shifts to the right of originals supply curve.
Goals of Firms: If the firms expect higher profits in the future, they
will take the risk and produce goods on large scale resulting in larger
supply of the commodities. The supply curve shifts to the right.
BACK BENDING SUPPLY
CURVE
"Wages can increase to a point where less labor is
offered in the market".
We have stated earlier those supply curves are
positively sloped. There can be sometime exceptions
to the rule there is a backward bending supply curve
of labor as is illustrated in the following schedule and
a diagram. Wage Rate (in Working Hour
Dollars) (per day)
Schedule: 10 10
20 12
30 13
50 10
SCHEDULE AND GRAPH
REPRESENTATION

Wage Rate (in Working Hour

Dollars) (per day)
10 10
20 12
30 13
50 10
CONT..
In the figure (5.4), a labor is willing to work for 10 hours a day
at a wage rate of $10 per hour. When the wage rate increases
to $30 per hour, he puts in 13 hours of work. If wage rise to
$50, he then prefers leisure to work and is willing to work for
10 hours only. The supply curve SS/ shows that a worker puts
in less labor when wage rate rises above $30 per hour. The
supply of labor then is negatively slopped and is backward
bending.
The reasons of the backward bending supply curve of
labor are:
(i) The substitution of leisure for work.
(ii) Increase in income which leads to rise in demand of
“The End”