Law of Supply

Copyright@ Ashis Kumar Pradhan

 What is supply?

• ‘Supply refers to the quantity of a commodity

which producers or sellers are willing to produce
and offer for sale at a particular price’, in a given
market, at a particular period of time.
 The three important aspects of
supply

• Supply is a desired quantity

• Supply is always explained with reference
to price
• Time during which it is offered for sale
 Supply Schedule and Supply
Curve

• Supply schedule shows a tabular representation of law of

supply. It presents the different quantities of a product that
a seller is willing to sell at different price levels of that
product.
• The graphical representation of supply schedule is called
supply curve.
• Supply Schedule and Supply Curve are of two types
• 1) Individual Supply Schedule & Individual Supply
Curve
• 2) Market Supply Schedule & Market Supply Curve
 Individual supply schedule &
Individual Supply Curve
• Refers to a supply schedule that represents the different
quantities of a product supplied by an individual seller at
different prices.
• The supply curve is showing a straight line and an upward
slope. This implies that the supply of a product increases
with increase in the price of a product.
 Market Supply schedule & Market
Supply Curve
• Refers to a supply schedule that represents the different
quantities of a product that all the suppliers in the market
are willing to supply at different prices.
• Market supply curve also represents the direct relationship
between the quantity supplied and price of a product.
Supply Function or Determinants
of Supply
• Supply function studies the functional relationship between supply
of a commodity and its various determinants.
• Sx = f ( Px, PR, NF, G, PF, T, Ex, GP)
• Where,
• Sx = Supply of a Commodity
• Px = Price of the Commodity
• PR = Price of the Related Goods
• NF = Number of Firms
• G = Goal of the Firm
• PF = Price of factors of Production
• T = Technology
• Ex = Expected Future Price
• GP = Government Policy
 Price of the Commodity
• There is a direct relationship between price of a
commodity and its quantity supplied. When price
increases, supply also increases because it motivate the
firm to supply more in order to get more profit. When
price decreases, smaller quantity will be supplied as
profit decreases.
 Price of Related Goods
• Producers always have the tendency of shifting from the
production of one commodity to another commodity. If
the prices of another commodity increases, especially
substitute goods, producers will find it more profitable to
produce that commodity by reducing the production of
the existing commodity.
• For Example: Suppose the seller of tea notice that the
price of coffee increases . They may reduce the amount of
resources devoted to the selling of tea in favour of coffee.
 Number of Firms
• Market supply of a commodity depends upon number of
firms in the market. Increase in the number of firms
implies increase in the market supply, and decrease in
the number of firms implies decrease in the market
supply of a commodity.
 Goal of the Firm
• If goal of the firm is to maximise profits, more quantity
of the commodity will be offered at a higher price.
• On the other hand, if goal of the firm is to maximise sale
more will be supplied even at the same price.
 Price of the Factor of
Production
• Supply of a commodity is also affected by the price of
factors used for the production of the commodity.
• If the factor price decreases, cost of production also
reduces.
• Accordingly, more of the commodity is supplied at its
existing price.
• Conversely, if the factor price increases cost of
production also increases. In such a situation less of the
commodity is supplied at its existing price.
 Change in Technology
• Change in technology also affects supply of the
commodity.
• Improvement in the technique of production reduce cost
of production Consequently, more of the commodity is
supplied at its existing price.
 Expected Future Price
• If the producer expects price of the commodity to rise in
the near future, current supply of the commodity will
reduce.
• If, on the other hand, fall in the price is expected, current
supply will increase.
 Government Policy
• ‘Taxation and Subsidy’ policy of the government affects
market supply of the commodity.
• Increase in taxation tends to reduce supply. On the other
hand, subsidies tend to increase supply of the
commodity.
 THE LAW OF SUPPLY
• ‘Law of supply states that other things remaining the
same, the quantity of any commodity that firms will
produce and offer for sale rises with rise in price and falls
with fall in price.’
• i.e. Higher the price, higher will be quantity supplied and
lower the price smaller will be quantity supplied.
• ‘Other things remaining the same’ means determinants
other than own price such as technology, goals of the
firm, government policy, price of related goods etc.
should not change.
 THE LAW OF SUPPLY

• SS Slopes upward from left to right.

• It shows positive relationship between price of the
commodity and its quantity supplied.
• As price rises quantity supplied also rises.
 Exceptions to the Law of
Supply
• The law of supply does not apply strictly to agricultural
products whose supply is governed by natural factors. If
due to natural calamities, there is fall in the production
of wheat, then its supply will not increase, however high
the price may be.
• Seller may be willing to sell more units of a perishable
commodity at a lower price.
 Why Does Supply Curve Slope
Upwards?
• The level of price determines profit. i.e. higher the price,
higher the profit and vice versa. So higher the price, the
greater is the incentive for the producer to produce and
supply more in the market, other things remain the
same.
• Positive slope of supply curve is also caused by the rise in
the cost of production. Usually cost of production
increases with increase in production. In this situation a
producer will produce and sell more units only at a
higher price.
• The rise in price also motivates other producers to
produce this commodity so as to earn higher profit.
 Change in Quantity Supplied or Extension
and Contraction of Supply

• Increase in quantity supplied of a commodity due to

rise in its price is called Extension of Supply and
decrease in quantity supplied due to fall in its price is
called Contraction of Supply.
• There will be a movement in
Supply curve.
Change in Supply or Increase and
Decrease in Supply
• Increase in Supply occurs when more is supplied at the
existing price, while decrease in supply occurs when less
is supplied at the existing price. While increase in supply
cause a forward shift in supply curve, decrease in supply
cause a backward shift in supply curve.