Supply

• A consumer can demand for a good only if the

good is available.A Producer / seller

makes the goods available to the consumer.i.e. A producer/seller

SUPPLIES commodities in the market.

Sometimes the producer and seller may be the same person, some times they may be different.

So farmers, manufactures and sellers who supply commodities

are all called SELLERS.

Meaning of Supply

• Supply of a commodity is the quantity of the commodity

that a seller offers

for sale

at a given price

at a given time.

The Definition of Supply includes :

• 1. The quantity of a commodity offered for sale.• 2. The price of a commodity at which the seller is

willing to sell the commodity.• 3. The time period which the seller is willing to

sell the quantity of the commodity.

Stock and Supply

Stock :The total quantity of a commodity available with a seller/firm at a particular point of time is called stock.

Supply : Supply is that part of the stock that the seller is ready to sell at a given price at a given time.

Stock is measured at a particular point of time. Supply is a flow and is measured over a period of time.

Factors Affecting Individual Supply (GO-PPT)

• 1. Price of the commodity.• 2. Technology of production.• 3. Price of inputs.• 4. Price of other related goods.• 5. Objective of the firm.• 6. Government policy.

1. Price of the commodity.

• When a producer produces a commodity he spends on factors of production , raw materials etc.

• He recovers or gets back this cost by selling the commodity at a price.

[Price = Average Revenue (AR = TR/Output) = P x Q = P x Q = P

So Price = Average Revenue Q Q]

Higher the Price higher the Average Revenue and

higher the total revenue.

2. Technology of production.• An improvement in technology reduces the cost of production

per unit of commodity and so increases the profit of the firm.• This encourages the firm to supply more of the commodity.• Old and inferior technology increases cost of production and

reduces profit.

3. Price of inputs.

• Suppose a firm is producing ice creams.

• If the price of milk falls, the cost of production will also fall.

• This will increase the profit.• So the firm will increase the

supply of ice cream.

• Suppose a firm is producing ice creams.

• If the price of milk increases, the cost of production will also rise.• This will decrease the profit.• So the firm will decrease the

supply of ice cream.

4.Price of other related goods

• Supply of a commodity is influenced by the price of other related goods.

• Let us suppose a farmer produces two goods wheat and rice.

• If the price of rice rises, the farmer cam make more profit by producing rice.

• So the farmer will produce more rice.• This will lead to supply of rice to increase and supply

of wheat will decrease.

5. Objective of the firm.

• Different firms have different objectives.• Some firms want to maximise profits.• Some firms want to maximise sales.• Some firms want to increase employment opportunities.• Some firms want to increase their goodwill.• Thus supply of a commodity is influenced by the objective of the

firm.

6. Government policy.

If the government increase the rate of value added tax or sales tax on a commodity, it will increase the cost of production per unit.And decrease the supply of the commodity.

Government policy influences the supply of a commodity.

If the government decreases the rate of value added tax or sales tax on a commodity, it will decrease the cost of production per unit.And Increase the supply of the commodity.

Individual supply schedule of a commodity

• Supply of a commodity

by an individual firm is

called individual supply.

• A tabular presentation

of different quantities

of a commodity

supplied by a firm

at different prices

is called

individual supply schedule.

Supply of sugar of Firm 'X

Price (Rs. Per quintal)

Quantity supplied of sugar per

day (in quintal

2800 8

2900 9

3000 10

3100 12

3200 13

Law of Supply

• All other factors remaining same, the price of a commodity

and its quantity supplied

are directly related.• AS Price of a commodity increases,

The quantity supplied of that commodity also increases.

Supply curve

Supply curve shows different quantities of a commodity supplied at different prices per unit in a diagrammatic form.

Shape of the supply curve• According to the law of supply,

when other factors determining supply remain constant, a firm offers more quantity of a commodity for sale at a higher price and less at a lower price.

• This shows that PRICE and QUANTITY have a DIRECT relationship.

• DUE to which the supply curve is UPWARD sloping from LEFT to RIGHT.

Shape of the supply curve• The reason why a firm supplies more a t a higher price and less at a

lower price is because of the following reasons:

• 1. As price rises of the commodity, the profits also rise and this encourages the firms to supply more quantity of the commodity.

Shape of the supply curve• 2. A rise in price of the commodity encourages the

seller to sell of a part of his stock.

Shape of the supply curve• 3. An increase in price of the commodity

leads to increase in profits and this attracts new firms to enter the market .

This increases the supply of the commodity in the market.

Market supply of a commodity

• The total quantity of a commodity

supplied by all the firms

in the market at a given price at a given time

is called the market supply of that commodity.

Market supply schedule of a commodity

• Market Supply schedule of a commodity

is the sum of the quantities of the commodity supplied by all the firms in the market at different prices.

Market Supply of Sugar

Price (s. per quintal)Quantity supplied of sugar

per day(in quintals)

Market supply of

sugar (in Quintals)

Firm X Firm Y Firm Z

2800 8 10 15 33

2900 9 11 16 36

3000 10 12 17 39

3100 12 14 20 46

3200 15 17 25 57

Factors determining Market supply

1. Number of Sellers/Firms: If number of firms increases, market supply will also increase.

2. Expected Future Price.a. If the price of a commodity

is expected to rise in the near future,

the firm will supply less quantity of the commodity at present

in expectation of higher profit due to price rise in future.

b. If the price of a commodity is expected to fall

in near future, firms will supply more

quantity of the commodity for sale at present in expectation of less profit in future.

Question Review…

• 1. Name the three elements included in the definition of supply.

• 2. What are the factors that influence individual supply?

• 3. If price of a commodity increases, the firm will __________(increase/decrease) the supply of the commodity.

• 4. Price is the same as ___________ revenue.

• 5. An improvement in technology reduces the _____ and increases the _______.

• 6. If price inputs fall, the cost of production will ____(increase/decrease) and profits will _______(increase/decrease) .

7. If a farmer produces two goods cotton and sugar, if the price of sugar increases, the farmer will produce more of _____ and less of _____.

8.If the government increases the tax on a commodity the price of the commodity will _________ (increase/decrease), because the ___________ increases.

9.Supply of a commodity by an individual firm is called ______________.

10.Supply curve slopes_____________ from ______ to ________.

11. Price and Supply are __________(directly/inversely) related.

12.A rise in price leads to ______ (increase/decrease) in profits , so firms will supply _______(more/less).

Question Review…