Supply Analysis and The Law of Supply

Supply Analysis and The Law of Supply:

Supply can be defined as a schedule of the amount of a good that would be offered for sale at all possible prices during any one period of time.

Thus supply means the quantity of goods offered for sale at a given price.

According to Thomas, "The supply of goods is the quantity offered for sale in a given market at a given time at various prices."

Supply is different from stock. Stock is the total volume of a commodity that can be brought into the market for sale at a short notice and supply means the quantity which is actually brought into the market.

For perishable commodities, supply and stock are the same because it can not be stored. In short, the stock is a potential supply.

Supply Function: It is a set of determinants of supply. A supply function can be stated as follows:

Sx = f(Pf, T, Cp, Gp, N.......etc.)

Where,

Sx = Supply of a good x

Pf = Price of factor input

T  = Technology

Cp = Cost of production

Gp = Government Policy

N = Number of firms, etc.

Determinants of Supply:

• Natural Factors: If natural factors like climatic conditions are favorable then it results in higher production and expansion in supply and vice-versa.
• Cost of Production: If the cost of production is low then it will lead to high supply. Wages, Interest, and price of inputs affect the cost of production.
• Change in the technology of production: If advanced technology and modern equipment are used in production then it will raise the output and expansion in supply.
• Prices of related-goods: If the price of related-goods falls, then the demand for the main-products will decrease & so will the supply.
• Monopoly Power: In the case of monopoly or oligopoly, the market is controlled by a single or few sellers, supply tends to below. Generally,  supply would be more under perfect or imperfectly competitive market.
• Government Policy: If the government encourages production in the private sectors by granting subsidies, development rebates, tax concession, etc. There will be an increase in supply.
• Complementary Goods: In case of joint demand, the production of one product may lead to the production of other products also.
• Transport and Communication: If there is an improvement in transport and communication, then it will ease the free and fast movements of goods from production centers to marketing centers.
• Future rise in Price: If there is an anticipation of a future rise in price, the current supply tends to fall.

All these factors influence the supply of a product in the market and help the firm in preparing its production plan and sales strategy.

The Law of Supply: It states that there is a direct positive relationship between the price of a commodity and its quantity supplied. The producers would be willing to sell more at a higher price and vice versa, "Other things remaining the same, as the price of a commodity rises, its supply is extended and as the price falls, its supply is contracted."

There is a functional relationship between supply and price. 

Mathematically, S=f[P] 

Supply Schedule: The supply schedule shows a tabular representation of different quantities of a commodity supplied at various prices. It shows the functional relationship between price and quantity supplied.

There is a direct relationship between price and supply. Supply increases with the rise in price and decreases with the fall in price.

Supply Curve: The supply curve is a graphic representation of the supply schedule. The upward sloping curve indicates that the quantity supplied expands with the rise in price and vice-versa.

 

In the above diagram, the quantity supplied is shown on  OX and the price is on OY axis. SS is the supply curve that is moving upward from left to right.

Assumptions of the Law of Supply:  

1- There should be no change in the numbers of firms and the scale of production.

2- The technique of production should not be changed.

3- The cost of the production should remain unchanged.

4-The prices of other related goods should remain constant.

5-Government policies such as taxation policy, trade policy, etc., should remain constant.

Exceptions to the Law of Supply: Generally, the supply curve has a positive slope that indicates that the higher the price, the more will be produced. 

but under certain circumstances, supply may not expand with the rise in price. In this case, the supply curve slopes backward.

These exceptions are as follows:

1. Anticipation of a fall in Price:  If a heavy further fall is anticipated, the seller will try to sell more even at the current lower price. 

2- Perishable Goods: In the case of perishable goods, like vegetables, fruits, dairy products, etc., sellers will sell more even if the prices are falling. It is because of the very short lifetime of these products, the seller cannot hold it for long.

3-Stock clearance: If the seller wants to get rid of his old products, then also he sells more at a reduced rate.

4- Agricultural Goods: The law of supply is not applicable for agricultural goods as their production depends on climatic circumstances. If the production of agricultural products is low due to the unexpected change in climate, then it's not possible to increase the supply even at higher prices.

5- Auction: In the case of an auction, the price is determined by the bidder. The auctioneer is not interested in maximizing profits by selling more at a higher price.

Expansion and Contraction in Supply

When the supply of a product changes only due to a change in the price of that product alone, it is called either expansion or contraction in supply. When more quantity is supplied at a higher price, it is called expansion in supply and, when less quantity is supplied at a lower price, it is called contraction in supply. The seller moves either in the upward or downward direction along with the same supply curve.

Increase or Decrease in Supply

An increase in supply means more supply at the same price or the same quantity of supply at a lower price. In this case, we have to draw a new supply curve. The forward shift indicates an increase in supply.

A decrease in supply means less quantity is supplied at the same price or the same quantity is supplied at a higher price. There is a backward-shift in the supply-curve which indicates a decrease in supply.

The law of supply is one of the most fundamental concepts in economics. The Law of Supply and the law of demand both are necessary to determine the prices of goods and services.

Dr. Swati Gupta

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