Law of Supply

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 are….

• 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.

Price of Milk (Per Quantity

liter in Rs) Supplied (1000
per day in
liters)

10 10
12 15
14 20
16 25

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.
Price of Individual Supply Market
Supply
Product
X
A B C
100 750 500 450 1700
200 800 650 500 1950
300 900 750 650 2300
400 1000 900 700 2600

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 affects
government market supply of the commodity.

Increase in taxation tends to reduce supply. On the

other hand, subsidies tend to increase supply of the
commodity.
Law of Supply
 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
Price of Rice Quantity
(Rs) Supplied (kg)
10 5
11 6
12 7
13 8
14 9
15 10
16 11

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.
 Assumptions of the Law of Supply

• There is no change in the prices of the factors of production.

• There is no change in the technique of production.

• There is no change in the goal of firm.

• There is no change in the prices of related goods.

• Producers not expect change in the price of

commodity
do in thethe
near future.
Why More of a Good is Sold When its Price
Increases?
Or
Why Does supply Curve Slope Upwards?
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 or Movements Along the
Supply Curve

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.
Change in Supply or Increase and Decrease in
Supply or Shift in Supply Curve

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.
Elasticity of Supply
 Elasticity of Supply
The law of supply indicates the direction of change—if price
goes up, supply will increase. But how much supply will rise in
response to an increase in price cannot be known from the
law of supply.

To quantify such change we require the concept of elasticity

of supply that measures the extent of quantities supplied in
response to a change in price.
 Elasticity of Supply

Elasticity of supply measures the degree of responsiveness of

quantity supplied to a change in own price of the
commodity. It is also defined as the percentage change in
quantity supplied divided by percentage change in price.

It can be calculated by using the following formula:

ES = % change in quantity supplied/% change in price
Symbolically,
ES = ∆Q/Q ÷ ∆P/P = ∆Q/∆P × P/Q
 Types of Elasticity of Supply
Like elasticity of demand, there are five cases of ES:

(a) Elastic Supply (ES>1):

(b) Inelastic Supply (ES< 1):

(c) Unit Elasticity of Supply (ES = 1):

(d) Perfectly Elastic Supply (ES = ∞):

(e) Perfectly Inelastic Supply (ES = 0):

 Perfectly Elastic Supply (ES = ∞)
The economic interpretation of this
supply curve is that an unlimited
quantity will be offered for sale at
the price OP. If price slightly drops
down below OP, nothing will be
supplied.

The supply curve PS1 drawn

Figure
in has an ofsupply
equal to
elasticity infinity. Here
curve
the has been drawn parallel to the
supply
horizontal axis.
 Perfectly Inelastic Supply (ES = 0)
This curve describes that whatever
the price of the commodity, it may
even be zero, quantity supplied
remains unchanged at OQ. This sort
of supply curve is conceived when
we consider the supply curve of land
from the viewpoint of a country, or
the world as a whole.
Unitary Elasticity of Supply (ES = 1)
If price and quantity supplied change
by the same magnitude, then we
have unit elasticity of supply.

Any straight line supply Curve passing

through the origin, such as the one
shown in Figure, has an elasticity of
supply equal to 1. This can be verified
in this way.
 Relatively Elastic Supply (ES>1)
Supply is said to be elastic when a
given percentage change in price
leads to a larger change in quantity
supplied. Under this situation, the
numerical value of Es will be greater
than one but less than infinity.

Here quantity supplied changes by a

larger magnitude than does price.
 Relatively Inelastic Supply (ES< 1)
Supply is said to be inelastic when a
given percentage change in price
causes a smaller change in quantity
supplied.

Figure depicts inelastic supply curve

where quantity supplied changes by
a smaller percentage than does price.
Measurement of Price Elasticity
of Supply
Measurement of Price Elasticity of Supply
This concept is parallel to the concept of price elasticity of
demand.

It points out the reaction of the sellers to a particular change in

the price of the commodity. It explains the quantitative changes
in supply of a commodity, due to a given change in the price of
the commodity.

Methods for Measuring Price Elasticity of Supply:

Price elasticity of supply can be measured by the following
methods:
1. Percentage Method
 1. Percentage Method
Like elasticity of demand, the most
common method for measuring
price elasticity of supply (Es) is
percentage method. This method is
also known as ‘Proportionate
Method’.

According to this method, elasticity

is measured as the ratio of
percentage change in the quantity
supplied to percentage change in the
price.
 1. Percentage Method
For Example: A producer offers to sell 400 units of a
commodity when its price is Rs. 10 per unit, while only 200
units are offered if the price reduces to Rs. 5 per unit. Find
elasticity of supply.

Solution:
ES = Percentage Change in quantity supplied
Percentage change in Price

= 200 x 10
5 400
ES = 1
 Factors Affecting Elasticity of Supply

1) Nature of the Inputs Used: If factors of production are

those which are commonly used (and therefore easily
available), supply of the commodity will be elastic. On the
other hand, if specialised factors are used (which are not
easily available), supply will be less elastic.

2) Natural Constraints: The elasticity of supply is also

influenced by the natural constraints in the production of a
commodity. If we wish to produce more teak wood, it will
take years of plantation before it becomes usable. Supply
of teak wood will therefore be less elastic.
 Factors Affecting Elasticity of Supply

3) Risk Taking: The elasticity of supply depends on the

willingness of entrepreneurs to take risk. If entrepreneurs
are willing to take risk, the supply will be more elastic. On
the other hand, if entrepreneurs hesitate to take risk, the
supply will be inelastic.

4) Nature of the commodity: Perishable goods are relatively

less elastic in supply than durable goods, because it is
difficult to store the perishables.
 Factors Affecting Elasticity of Supply

5) Time Factor: Longer the time period, greater will be the

elasticity of supply. Because, over a longer period of time,
more and more factors are easily available and their input
can be changed to increase ( or decrease) output of the
commodity.