Meaning Of Supply: Supply is the quantity of output
brought for sale in the market at a certain price in a given period of time.
Supply is also defined as the amount of a good offered for sale at given price.
Supply is the range of quantities of commodity that sellers are willing and
able to sell at different prices in a given period of time.
Difference Between Stock And Supply: Stock is the quantity of output
which seller/businessman has with him and has not yet been brought for sale.
Where as supply is the quantity of output brought from the existing stock for
sale at a certain price in the market.
Law Of Supply: The law of supply may be defined as
other things remaining the same as the price of any commodity rises, its supply
also rises and as a price falls, its supply also falls. There is direct
relationship between the price a commodity and its quantity offered for sale
over a specific period of time.
Supply Schedule: Supply schedule represents the
relation between prices and the quantities supplied in given period of time.
|
Price |
Supply |
|
Rs.4 |
40Kg or units |
|
Rs.8 |
80Kg or units |
|
Rs.12 |
120Kg or units |
|
Rs.16 |
160Kg or units |
Explanation: In the above supply schedule, we can
see that when the price of a commodity is Rs.4, 40 units of that commodity are
supplied and when price rises from Rs.4 to Rs.16 per unit, the quantity
supplied also increases from 40 to 160 units. So therefore, we can say that as
price goes up, quantity supply also goes up and vise versa.
Assumption Of The Law Of Supply: There are some reasons which are
called non-price factors.
There Must Not Be A Change In Cost Of
Production: For
explanation of the law of supply, the cost of production is assumed to remain
constant. If the cost of production was to go down, then the price of the
product will also go down. Therefore the supply increases and the law of supply
does not hold true. (Cost of production = combination of money rewards for four
factors of production, or cost of production = rent + wages + interest +
profit).
There Must Not Be A Change In Price
Of Capital Goods: Capital
goods are used to produce more goods. Examples of such goods are machinery,
agricultural equipment's etc. If the price of capital goods go down, the cost of
production would also go down, which will result an increase supply and the law
of supply does not hold true.
There Must Not Be A Change In
Production Techniques: If an improvement in techniques takes place in a particular industry, it
will help in reducing its cost of production. In this case the law of supply
does not hold true.
Change In Quantity Or Extension And
Contraction Of Supply: According to the law of supply, when price rises supply increases and
when price falls supply decreases. When supply changes due to change in price
level, it is known as extension and contraction of supply. By extension of
supply we mean an increase in supply due to increase in price level. Similarly
by contraction of supply, due to fall in price level.
|
Price |
Extension and contraction of supply |
|
Rs.2 |
10 units |
|
Rs.4 |
20 units |
|
Rs.6 |
30 units |
|
Rs.8 |
40 units |
|
Rs.10 |
50 units |
In the above
supply schedule, when price is falling the supply is decreasing and when price
is rising the supply is increasing.
Change In Supply Or Rise And Fall Of
Supply: Change in
supply means when on the same price supply changes due to other non-price
factors like income, taste, fashion etc.
Rise In Supply: Rise in supply will occur when price
remaining the same supply increases or price decreases but supply remains same.
Price Remains Same But Supply
Increases.
|
Price |
Supply |
|
Rs.20 |
100Kg |
|
Rs.20 |
200Kg |
|
Rs.20 |
300Kg |
Price Decreases And Supply Remain
Same.
|
Price |
Supply |
|
Rs.5 |
100Kg |
|
Rs.10 |
100Kg |
|
Rs.5 |
100Kg |
Fall In Supply: Fall in supply also may occur in two
ways. It will occur when either price remains the same and supply decreases or
at higher price same quantity is supply.
Price Remains Same And Supply
Decreases.
|
Price |
Supply |
|
Rs.20 |
100Kg |
|
Rs.20 |
80Kg |
Price Increases But Supply Remains
Same.
|
Price |
Supply |
|
Rs.20 |
100Kg |
|
Rs.30 |
100Kg |
Factors Of Change In Supply: Rise or fall in supply occurs due to
change in the following factors. These are called non-price factors.
1) Cost Of Production: When the cost of various factors of production of a certain commodity
rises supply falls. On the other hand due to decrease in cost of production,
supply of certain commodity rises.
2) Climate Situation: If climate situation remains favorable, agricultural production
increases and as a result of this supply will rise and due to bad season supply
falls because product is affected by the season.
3) Improvements In The Methods Of Production: The supply of a commodity may also
be affected by progress in technique. This will result in greater production
and so a rise in the supply of the commodity.
4) Development Of Means Of Transport And Communication: The supply of a commodity may also
rise due to improvement in the means of communication and transport. When this
system will be fast supply will automatically increases.
5) Political Changes: If a country wages was against another country or some kind of political
disturbance takes place just as we had at the time of partition, then the
channel of production are disorganized. It results fall in the supply of
certain goods and vice versa.
6) Policy Of The Government: When restriction are levied by the government on the
movements of commodities supply will fall, on the other hand when such
restrictions are removed, supply will rise.
7) Taxation Policy: If a government levies heavy taxes on the import of a particular
commodity then the supply of these commodities fall at each price.
8) Goals Of Firm:
If the firm expect higher profits in the future, they will take the risk and
produce goods on large scale resulting in larger supply of the commodity.
Meaning Of Elasticity Of Supply: Elasticity of supply is the
responsiveness of quantity supplied in relation to a change in price. By
elasticity of supply we mean that ratio at which supply changes due to change
in price level, when due to little change in price supply changes to great
extent, we will say supply is more elastic. On the other hand when due to a big
change in price supply changes to little extent, then supply will be less
elastic.
Es' = proportionate change in supply
Proportionate change in price
Es' = change in supply/original supply
Change in price/original price
Es' = del Q/Q = del Q divided by del
P
Del P/P Q P
Es' = del
Q multiply by P
Q del
P
It is also
positive because the relation between price and quantity supply is direct.
Degrees Of Elastic Of Supply: There are some categories of price
elasticity of supply.
Perfectly Or Infinitely Elastic
Supply: When a small
change in price level leads to a great change in quantity supplied, then it is
called the infinite elastic supply.
Perfectly Inelastic Supply: When there is no change in supply
due to change in price level, then it is called perfectly inelastic supply. Es'
= 0
|
Price |
Q S |
|
Rs.2 |
10Kg |
|
Rs.4 |
10Kg |
|
Rs.6 |
10Kg |
In the above
schedule, there is no response to the quantity supplied with the change in
price.
Elastic Supply: When %age change in quantity
supplied is greater than %age change in price level, the supply is then called
elastic supply or more elastic.
|
price |
Q S |
|
Rs.4 |
50Kg |
|
Rs.6 |
150Kg |
|
Rs.8 |
250Kg |
In the above
schedule, shows the quantity and the prices. Here change in quantity supply is
greater than charge level, therefore the supply is more elastic.