4 supply function


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4 supply function

  1. 1. 1 SUPPLY FUNCTION  In economics, supply during a given period of time means the quantities of goods which are offered for sale at particular prices.  Hence, the supply of a commodity is defined as the amount of that commodity which a seller (or producer) are able and willing to offer for sale at a particular price during a certain period of time.  Supply is a relative term.  It always referred to in relation to time and price.  A statement of supply without reference to price and time conveys nothing in economics.  For instance, a statement such as ‘the supply of milk is 500 liter’ is a meaningless in economics.  In economics, one must say, the supply at such and such price and during a specific period.  Hence the above statement becomes meaningful if it is said “at a price of 20 per liter, a dairy farm’s daily supply of milk is 500 liters’.
  2. 2. 2  Secondly, supply is what the seller is able and willing to offer for sale.  The ability of a seller to supply a commodity, however, depends on the stock available with him. Thus stock is the major determinant of supply of a commodity. Determinants of Supply: The supply of the commodity depends not only on the price of the commodity but also on several other factors collectively called the conditions of supply. These conditions are as follows:
  3. 3. 3 1. Price of the Commodity: Since higher money income is necessary to induce producers to produce more, the amount supplied therefore increases when producers get higher price for the product. 2. Price of Other Goods: Change in the price of other goods in the market also has influence on the supply of the commodity. For Example: if the price of good Y rises, the producer of good X will start considering switching his production to good Y as it has become relatively more attractive to produce Y now then before.
  4. 4. 4 3.Prices of Factors of Production: the cost of production of a commodity depends upon the prices of different factors of production. When prices of one of the factors are increases, the production cost would be higher and the price of the particular product will be higher as well and vice-versa. This will lead to changes in the profitability of the different commodities and their amount supplied. 4. Producer’s Objective: the producers may have many objectives like profit maximization, sales revenue maximization, goodwill etc. Amount supplied of a commodity is often influenced by the producer’s objective. A goodwill maximiser will sell more commodities than the profit maximiser.
  5. 5. 5 5. Factors Outside Economic Sphere: weather conditions, floods and droughts, epidemics etc do cause fluctuations in the supply of goods, particularly of agricultural goods. Fire, war and earthquakes may destroy productive assets of a commodity and curtail future supply. 6. Tax and Subsidy: A higher tax on commodity or factors of production rise its cost of production and consequently production and supply become less. A subsidy on the other hand, provides incentive to production and augments supplies.
  6. 6. 6 Supply Function:  Mathematically,Mathematically, the supply function explains the relationshipthe supply function explains the relationship between the quantity supplied for a commodity and itsbetween the quantity supplied for a commodity and its determinants.determinants.  In supply function, the determinants of supply can be summarizedIn supply function, the determinants of supply can be summarized as under:as under: SSXX = f (P= f (PXX, P, PFF,, PP11……P……Pnn, O, T, t, s, u), O, T, t, s, u) Where: SWhere: Sxx refers to the quantity supplied of product x.refers to the quantity supplied of product x. PPxx refers to the price of product xrefers to the price of product x PPFF refers to the set of prices of the factor inputs employed forrefers to the set of prices of the factor inputs employed for producing Xproducing X PP11…..P…..Pnn refers to the price of all other related products in anrefers to the price of all other related products in an economy.economy. O refers to factors outside the economic sphereO refers to factors outside the economic sphere T refers to the technology usedT refers to the technology used t refers to taxt refers to tax s refers to the subsidiess refers to the subsidies u refers to all other determinants which are not covered in theu refers to all other determinants which are not covered in the above mentioned determinants.above mentioned determinants.
  7. 7. 7 Law of Supply:  The law of supply reflects the general tendency of the sellers in offering their stock of a commodity for sale in relation to the varying prices.  It describes seller’s supply behaviour under given conditions.  It has been observed that usually sellers are willing to supply more with arise in price. Statement of the Law:  CETERIS PARIBUS, the supply of a commodity expand (i.e. rises) with rise in prices and contracts (i.e. Falls) with fall in its prices.  The law thus suggests that the supply varies directly with change in its price. So, a larger amount is supplied at higher price than at lower price at market.
  8. 8. 8 Explanation of the Law: Supply Schedule Price of ball pen (Rs.) Quantity Supplied (in 000 per Unit) 11 12 13 14 10 13 20 25
  9. 9. 9 Diagrammatic Representation: Y X S S Prices (Rs.) Quantity Supplied
  10. 10. 10 Demand Supply Equilibrium (Market Equilibrium):  When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium.  At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded.  Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.
  11. 11. 11
  12. 12. 12 As you can see on the chart, equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity.  In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relation to fluctuations in demand and supply. Disequilibrium occurs whenever the price or quantity is not equal to P* or Q*.
  13. 13. 13 1. Excess Supply   If the price is set too high, excess supply will  be created within the economy and there will  be allocative inefficiency.  
  14. 14. 14 At  price  P1  the  quantity  of  goods  that  the  producers wish to supply is indicated by Q2.  At  P1,  however,  the  quantity  that  the  consumers  want  to  consume  is  at  Q1,  a  quantity much less than Q2.  Because  Q2  is  greater  than  Q1,  too  much  is  being  produced  and  too  little  is  being  consumed.  The  suppliers  are  trying  to  produce  more  goods,  which  they  hope  to  sell to increase profits, but those consuming  the goods will find the product less attractive  and purchase  less  because  the  price  is  too  high. 
  15. 15. 15 2. Excess Demand   Excess demand is created when price is set below  the equilibrium price. Because the price is so low,  too many consumers want the good while producers  are not making enough of it.   
  16. 16. 16 In this  situation,  at price P1, the quantity of  goods demanded by consumers at this price  is Q2. Conversely, the quantity of goods that  producers are willing to produce at this price  is Q1.  Thus,  there  are  too  few  goods  being  produced  to  satisfy  the  wants  (demand)  of  the  consumers.  However,  as  consumers  have  to  compete  with  one  other  to  buy  the  good at this price, the demand will push the  price  up,  making  suppliers  want  to  supply  more  and  bringing  the  price  closer  to  its  equilibrium.