Law of Supply, Individual and Market Supply Its Curve and Elasticity
Supply
- Willing to Offer to the Market at Various Prices during Period of Time
- Able to Offer to the Market at Various Prices during Period of Time
- What Firms Offer for Sale, Not Necessarily to What they Succeed in Selling
- Is a Flow i.e. as per unit of time, per day, per week, or per year
Definitions of Supply
• The Supply of Goods is the Quantity offered for Sale in a given Market at a given Time at various Prices. By : Thomas
• Supply refers to the Amounts of a Good that Producer in a given Market Desire to Sell, during a given Time Period at Various Prices, Ceteris Paribus. By : Samuelson
Determinants of Supply
• Price of the Good
• Price of Related Goods
• Price of the Factors of Production
• State of Technology
• Government Policy
• Other Factors
• Price of the Commodity
Ceteris Paribus i.e. Other Things Being Equal,
Relative Price of the Good ↑
Quantity Supplied ↑
This Happens Because Goods are Produced by the Firm to Gain Profits. Profit rises when Price rises.
• Price of the Related Good
Price of Related Good (Y)
Quantity Supplied of Other Good (X)
Rise in Price of Related Good makes it more Profitable for the Firm to Produce & Sell.
• Prices of the Factors of Production Change in Price of Factors of Production
Changes in Relative Profitability of Different Lines of Production
Producers Shift from one Line to Another
Supplies of Different Commodities change
• Government Policy
–Imposition of Commodities Taxes Increase the Cost of Production.
–Subsidies Reduce the Cost of Production which Increases Firm’s Supply.
• State of Technology
• Other Factors
–Govt. Industrial & Foreign Policies
–Goals of the Firm
–Market Structure, etc.
Law of Supply
• Law of Supply states that other things being equal, the Higher the Price, the Greater the Quantity Supplied or the Lower the Price, the Smaller the Quantity Supplied. By : Dooley
• The Law of Supply states that Other things being Equal, the Quantities of any Commodity that Firms will Produce & Offer for Sale, is Positively related to the Commodities own Price, Rising when Price Rises & Falling when Price Falls. By : Lipse
• There is a Direct Relationship Between Price & Quantity Supplied:
– Quantity Supplied Rises as Price Rises, Other things Constant.
– Quantity Supplied Falls as Price Falls, Other things Constant.
• The Law of Supply is accounted for by 2 Factors:
– When Prices Rise, Firms Substitute Production of One Good for Another.
– Assuming firms’ Costs are Constant, a Higher Price means Higher Profits.
• Behaviour of Supply Depends upon:
– Phenomenon Considered.
– Degree of Possible Adjustment in Supply.
– Time taken into Consideration i.e. Short- Run & Long Run.
Assumption to Law of Supply
• Law of Supply holds Good when "Other Things Remain the Same" meaning thereby, the Factors affecting Supply ,other than Price, are Assumed to be Constant.
• Supply Function: Qx= f(PX, Cx, Tx)
where, Qx = Supply of Commodity X
Px = Price of Commodity X
Cx = Cost of Production of Commodity X
Tx = Technology of its Production
Supply Schedule
• Supply Schedule is a Series of Quantities which Producer would like to Sell per unit of Time at Different Prices.
• Two Aspects of Supply Schedule
– Individual Supply Schedule
– Market Supply Schedule
Individual Supply Schedule
• It is defined as Quantities of a Given Commodity which an Individual Producer will Sell at all Possible Prices at a given Time.
Market Supply Schedule
• It is defined as the Quantities of a Given Commodity which all Producers will Sell at all Possible Prices at a given Moment of Time. In Market there are many Producers of a Single Commodity. By Aggregating the Individual Supply, the Market Supply Schedule is Constructed.
Supply Curve
• A Supply Curve is a Locus of Points showing various Price-Quantity Combinations of a Seller.
• It shows the Direct Relationship between Price & Quantity Supplied.
• It Slopes Upwards to the Right.
The Supply Curve Slopes Upwards from Left to Right, meaning thereby that when Price is High Quantity Supplied is also High and vice versa.
Exceptions to Law of Supply
• Supply of Labour: If we take the Supply of Labour at very High Wages, we may find that the Supply of Labour has decreased instead of Increasing.
• Agricultural Products: Since the Production of Agricultural Products cannot be Increased beyond a certain Limit, the Supply cannot be Increased beyond this Limit even on an Increase in their Prices.
• Artistic Goods : Supply of Artistic Goods cannot be Increased or Decreased easily.
• Goods of Auction: Supply of Goods of Auction is Limited as such cannot neither be Increased nor Decreased.
• Hope of Change in the Prices of Commodities in Near Future: If the Price of Commodity is on Rising Pace, then the Supply of such Commodity Decreases as Producers and Sellers will like to Store this Commodity & Vice-Versa.
Expansion
• QS ↑ Price ↑
• Upward Movement Along the Supply Curve
Contraction
• QD ↓ Price ↓
• Downward Movement Along the Supply Curve
Increase & Decrease in Supply
Increase
• Q Supplied ↑ (at all prices) due to Change in Other Factors
• Rightward Shift
Decrease
• Q Supplied ↓ (at all prices) due to Change in Other Factors
• Leftward Shift
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