The concept of Supply

Like the term ‘demand’, the term ‘supply’ is also often misused in the ordinary language. Supply of a commodity is often confused with the ‘stock’ of that commodity available with the producers. Stock of a commodity, more or less, will equal the total quantity produced during a period less the quantity already sold out. But we know that the producers do not offer whole of their stocks for sale in the market, a part of industrial produces is kept back in godowns and is offered for sell in the market when it can fetch better prices. In other words the amount offered for sale may be less (or at the most in rare circumstances equal to) than the stocks of the commodity. The term ‘supply’ shows a relationship between quantity and price. By supply we mean various quantities of a commodity which producers will offer for sale at a particular time at various corresponding prices. In simple words, supply ( like demand ) refers to the quantity of commodity offered for sale at some price during a given period of time.

Factors on which supply of a commodity depends :

It is also known as the determinants of supply. The Important determinants of supply can be grouped together in a supply function as follows:

S_N=f (P_N,P_R,F,T,G )

Supply function describes the functional relationship between supply of a commodity (say N) and other determinants of supply, i.e., price of the commodity (P_N), price of a related commodity (P_R), prices of the factors of production (F), technical know-how(T) and goals or general objectives of the producer. Each of the factors influences supply in a different way. To isolate the effect of other factors we take these other factors as constant while considering the relationship between supply and one of the above variables. For example, if we want to study the relationship between price and supply of commodity, we shall assume other factors P_R, F, T and G to remain constant or unchanged.

• Price of the commodity, expressed as f(P_N), ie., other things being equal, supply of commodity N depends upon the price of commodity N. This sort of relationship is studied in what has’ come to be popularly known as the Law of Supply’. It implies that if the price of a commodity goes up, its supply shall expand and vice versa.
• Prices of related goods, expressed as f(P_R), ie., other things being equal, supply of commodity N depends upon the prices of the related goods. If the price of a substitute goes up, producers would, be tempted to divert their available resources to the production of that substitute.
• Prices of factors of production, expressed as f(F), ie., other things being equal, supply of a commodity depends upon the prices of factors of production. A rise in the price of one factor of production, will cause a consequent increase in the cost of producing those commodities which use a great deal of that factor and only a small increase in the costs of producing those commodities that use a small amount of the factor.
• State of technology, expressed as f(T), ie., the supply of a commodity depends upon the state of technology. Over the the time the technical know-how changes.
• Goals of firms, expressed as f(G), i e., other things being equal the supply of a commodity depends upon the, goals of firms producing that commodity. Ordinarily; every firm tries to attain maximum profits.
• Natural factors. The supply of the agricultural’ goods to a great extent depends upon the natural conditions. Adequate rain, fertility of land irrigation facilities, favorable climatic conditions etc., help in raising the supply of agricultural produce. Contrary to that, heavy rains, floods, drought conditions, etc., adversely affect the agricultural production.
• Means of transportation and communication. Proper development of means of transportation and communication helps in maintaining adequate supply of the commodities. In case of short Supply, goods can be rushed from the, surplus areas to the deficient areas. But if the developed means of transportation are used to export goods, it will create scarcity of goods in the domestic market.
• Taxation Policy. Imposition of heavy taxes on a commodity discourages its production, and as a remit its supply diminishes. On the other, hand, tax concessions of various kinds induce producers to raise the supply.
• Future expectations of rise in prices. If the producers expect, an increase in the price in the near future, then they will curtail the current supply, so as to offer more goods in future at higher prices.

Law of Supply

It’s different from Law of demand. Law of supply explains the relationship between price of a commodity and its quantity supplied. Price and supply are directly related. A rise in price induces producers to supply more quantity or the commodity and a fall Prices, makes them reduce the supply. The higher is the price of the commodity the larger is the profit that can be earned, and, thus the greater is the incentive to the producer’ to produce more of the commodity and offer It in the Market. Likewise at lower prices, profit margin shrinks and hence producers reduce the sale .

Supply schedule and supply curve

If demand is held constant, an increase in supply leads to a decreased price, while a decrease in supply leads to an increased price. This relationship can be illustrated in the form of a table called supply schedule and the data from the table may be given a diagrammatic representation in the form of a curve.

Categories: Economics / Managerial Economics