THEORY OF SUPPLY | CHAPTER 11 | CLASS XI | ECONOMICS
Supply of a commodity refers to all the quantities of a commodity that the sellers are willing to sell at different price at a point of time.
It refers to a specific amount offered for sale at the specific price of the commodity.
It is a table showing all the quantities of a commodity that the sellers are willing to sell at different price at a point of time. It is of two types:
1) Individual Supply Schedule– It is a table showing all the quantities of a commodity that a single seller is willing to sell at various prices at a point of time.
2) Market Supply Schedule – It is a table showing all the quantities of a commodity that all seller or willing to sell at various price at a point of time.
It is a diagrammatic representation of all the quantities of a commodity that the sellers are willing to sell at different prices at a point of time.
1) Individual Supply Curve – It is a diagrammatic representation of all the quantities of a commodity that a single seller is willing to sell at different price at a point of time.
2) Market Supply Curve – It is a diagrammatic representation of all the quantities of commodity that all sellers are willing to sell at different price at a point of time.
It shows the functional relationship between the quantity supplied of a commodity and its various determinants of factors affecting it. Supply function can be expressed as:
Determinants Affecting Supply Curve
Own Price of a Commodity– Price of a commodity and its quantity supplied holds direct relationship. Other things remain constant, with rise in price quantity supplied extend and with fall in price quantity supplied contracts.
Price of Related Goods– Supply of a good depends upon the price of related goods. Consider a firm selling two substitute goods, if price of a good rises in the market the firm will be willing to sell less of other good at its existing price.
Price of Factor of Production – If price of production increases, then profit will decrease and supply will also decrease. Curve will observe a backward shift. If price of production decreases, then supply will increase. Curve will observe a rightward shift.
Government Policy – Profit and supply will decrease with decrease in tax resulting in backward shift of curve. Profit and supply will increase if Government will provide subsidy resulting in forward shift of curve.
Goal of the Firm – If goal of the firm is to maximize sales, more quantity will be supplied even at the same price and opposite if goal is to maximize sale.
Number of Firms in the Industry – Increase in the number of firms implies increase in the market supply. Decrease in the number of firms results in decrease in the market supply.
Stage of Technology – Improvement in the technique of production reduces cost of production consequently, more of the commodity is supplied at its existing price.
Business Expectation– In situations of bullish expectations, investment tends to rise and supply starts increasing. Just the opposite may happen in situation of bearish expectations.
Law of supply states that other things remaining constant, there is a positive relationship between own price of a commodity and its quantity supplied. With the rise in own price of a commodity, quantity supplied extend and with the fall in own price of a commodity, quantity supplied contract.
Assumptions of the Law
The law of supply assumes that all other determinants of supply of commodity, other than own price of the commodity remain constant
The number of firms remain fixed.
The government polices do not change
There is no change in the techniques of production
There is no change in the price of the factors of production
There is no change in business expectations.
There is no change in the goal of the firm. There is no change in the price of related goods.
Exceptions to the Law of Supply
The positive relationship between own price & quantity supplied of a commodity may not always hold good, or may not firmly hold good in certain situations as under:
The law of supply does not apply to agricultural products whose supply is governed by natural factors.
Supply of goods having social distinction will remain limited even if their price tends to rise
At a given point of time, sellers may be willing to sell more of a perishable commodity even at a lower price
Sale of old stock
Labour supply in under developed countries.
Movement along Supply Curve and Shift in Supply Curve
1) Change in Quantity Supplied – Change in quantity supplied is caused by the change in price of the commodity. It is the movement along a supply curve. It is shown on the same supply curve.
2) Change in Supply– Change in supply is caused by the factors other than the price of the commodity viz., change in prices of other commodities, change in technology, change in prices of inputs etc. It is a shift of the supply curve. It is shown on the new supply curve.
Price Elasticity of Supply
It measures the degree of extension and contraction of supply in response to a given change in own price of the commodity.
Measurement of Price Elasticity of Supply
1) Proportionate Method – According to this, elasticity of supply is ratio between ‘percentage change in quantity supplies’ and ‘percentage change in price of commodity’.
Es= (percentage change in QS)/ (percentage change in price)
2) Geometric Method –
Es = 1
Es > 1
Es < 1
Es = 0
Factor Affecting Elasticity Of Supply
Nature of Inputs Used – If commonly available inputs are used supply will be elastic. If inputs used are not commonly available, supply will be inelastic.
Natural Constraints – Elasticity of Supply s is significantly influenced by the natural constraints. If we wish to produce more teak wood, it will take several of years. Therefore, supply of teak wood will be less elastic.
Nature of the Commodity – Perishable goods are relatively less elastic in supply than durable goods because perishable goods have a shorter shelf-life than the durable goods.
Time Factor – Longer the time period, greater will be the elasticity of supply because over a long period of time, factors are easily available & supply can be increased.
Technique of Production – Supply will be less elastic in case production of a commodity involves use of a complex and expensive technology.
Risk Taking – If entrepreneurs are willing to take risk of higher output, the supply will be more elastic and vice versa.
Cost of Production -Supply will be less elastic in case increase in production causes a substantial increase in the cost of production.
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