complete theory of supply

2. Supply is the Quantity of a
commodity which is offered
for sale at a givenPRICE
during some particular
TIME

3. SUPPLY AND QUANTITY SUPPLIED
Supply
Supply refers to various
quantities offered for
sale at different
possible prices of the
commodity.
Quantity
Supplied
It refers to a specific
quantity of a commodity
that the producers are
ready to sale at a specific
price of the commodity

4. Market Supplyrefers
to the sum total of
various quantities
offeredfor sale by all the
individual firms at
different prices
Individual supply refers
to different quantities
offered for sale by an
individual firm at different
prices

5. Supply Schedule
Supply schedule is a
tabular statement showing
different quantities of a
firm is ready to sell at
different prices during a
given period of time
Price of Ice
Cream (₨)
Quantity
Supplied(units)
5 0
10 10
15 20
20 30
Table1.
individual
supply
schedule

6. Price of Ice
Cream(Rs)
Supply by
firm ‘A’
(units)
Supply by
firm ‘B’
(units)
Market
Supply (units)
5 0 0 0
10 10 5 10+5=15
15 20 10 20+10=30
20 30 20 30+20=50

7. 0
10
20
30
40
50
60
4 8 12 16 20
Quantity Suplied
Individual
Supply Curve
p
r
i
c
e

8. 0
5
10
15
20
25
0 15 30 50
Quantity Supplied
p
r
i
c
e

9. Supply Function
It is a functional relationship between
quantity supplied of a commodity and
factors affecting it.
Supply of commodity by a firm depends on
price of the commodity itself(Pn), prices of
other commodities(Pr), state of
technology(T), cost of factors of
production(F), objectives of the firm(O)
etc.
This can be mathematically as shown
below:

10.  Price of the commodity:- At a higher price,
producer offers more quantity of the commodity
for sale and at a lower price, less quantity of the
commodity is offered for sale. There is a direct
relationship between price and quantity supplied is
illustrated in the next section on “Law of Supply”.
 Price of related Goods:- Supply of a commodity
depends upon the prices of its related goods,
specially substitute goods. If the price of a
commodity remains constant and the price of its
substitute good Z increases, the producers would
prefer to produce substitute good Z. As a result, the
supply commodity x will decrease and of good Z
will increase.

11. State of Technology:- A change in technology of production
which lessens cost of production increases supply of the
commodity. As against this, the supply of those goods which
are being produced with old and inferior technique causing
increase in cost of production will fall.
Cost of factor of Production:- A change in the cost of production, i.e., prices of
factors of production also affects the supplyof a commodity. If wages of labour or
price of raw material increase,then cost of production will rise. As a result,
supplyof the good willfall because producerswouldprefer to produce some
other goods that can be producedat a lower cost.Objectives of Firm:- Sometimes, a
firm may be induced to increase
supply of a good not because it is
more profitable but because its
supply is a source of status and
prestige in the market. Likewise,
supply is also affected by the
priority given to different

12. The Law of Supply states that other things
remaining constant, quantity supplied of a
commodity increases with increase in the price and
decreases with a fall in the price.
Px(Rs) Sx(units)
10 100
11 200
12 300
Table:3 Supply Schedule

13. 9
9.5
10
10.5
11
11.5
12
12.5
100 200 300
Supply Curve
P
r
i
c
e
Supply
S
SS slopes upward from left to right. It shows positive relationship
between price of the commodity and its quantity supplied.
S

14. Assumptions of Law of Supply
 Price of other related goods should not
change
 Technology of production should not
change
 Cost of production should remain the same
 Goal of the firm should not change
 Taxation policy of the govt. should not
change

15. EXCEPTIONS TO THE LAW OF SUPPLY
Law does not apply strictly to the agriculture
products whose supply is governed by
natural resources.
Supply of goods having social distinction will
remain limited even if their price tends to
rise.
Sellers may be willing to sell more units of a
perishable commodity at a lower price.

16. Expansion of Supply
It refers to rise in supply
due to rise in the price
of good.
It results in upward
movement of the
curve.
Contraction of Supply
It refers to fall in supply
due to fall in price of
the good.
It results in the
downward movement
of the curve.
Price of ice
cream (Rs)
Quantity
Supplied
(units)
Description
1 1 Rise in price
5 5 Extension of
supply
Price of ice
cream (Rs)
Quantity
Supplied
(units)
Description
5 5 Fall in price
1 1 contraction
of supply

17. 0
1
2
3
4
5
6
1 5
Suply Curve
a
a
b
P
r
i
c
e
Supply
Expansion of Supply

18. 0
1
2
3
4
5
6
1 5
Supply curve
b
Supply
P
r
i
c
e
Contraction of Supply
a

19. Change in Supply(Shift)
Increase in Supply
 It means more
quantity supplied at
the same price of the
commodity.
 It results in forward
shift of supply curve.
Decrease in Supply
 It means less
quantity supplied at
the same price of the
commodity.
 It results in backward
shift of supply curve.
Price of ice
cream (Rs)
Quantity
Supplied
(units)
10 20
10 30
Price of ice
cream (Rs)
Quantity
Supplied
(units)
10 30
10 20

20. 0
5
10
15
20
25
30
35
20 30
S1
S2
Increase in Supply
Supply
P
r
i
c
e
Supply curve
shifts forward
from S1 to S2

21. 0
5
10
15
20
25
30
35
20 30
S2
S1
Supply
P
r
i
c
e
Decrease in Supply
Supply curve
shifts backward
from S1 to S2

22. Increase Decrease
 Improvement in
technique of
production
 Fall in price of related
goods.
 Fall in the cost of
production
 Fall in excise tax
 Obsolete technique of
production
 Increase in price of
related goods.
 Increase in the cost of
production
 Rise in excise tax

23. Price elasticity of supply is a measurement of
percentage change in quantity supplied of
a quantity supplied of a commodity in
response to some percentage change in its
price.
There are two well known methods of
measuring price elasticity of supply. These
are:-
(a)Proportionate method (b)Geometric
method

24. According to this method, elasticity of supply is
the ratio between ‘percentage change in
quantity supplied’ and ‘percentage change in
price’ of the commodity.
Es= Percentage Change in Quantity Supplied
Percentage change in Price
Es= ∆Q×P
∆P×Q

25. Geometric Method
Geometrically, elasticity of supply depends
on the ‘origin’ of the supply curve.
Assuming the supply curve to be a
straight line and positively sloped, we
can conceive three possible situations of
elasticity of supply as in the following
diagrams:

26. E=1, WHEN A STRAIGHT LINE, POSITIVELY SLOPED
SUPPLY CURVE STARTS FROM THE POINT OF ORIGIN
‘O’.
0
5
10
15
20
25
30
35
40
45
10 20 30 40
Supply Curve
P
r
i
c
e
Supply

27. E>1, when a straight line, positively
sloped supply curve starts from Y-axis
0
5
10
15
20
25
30
35
40
45
0 20 40 60
Supply Curve
P
r
i
c
e
Supply

28. 0
2
4
6
8
10
12
14
16
10 20 30 40
Supply Curve
P
r
i
c
e
Supply

29. 0
5
10
15
20
25
10
P
r
i
c
e
Supply

30. Infinite Elasticity of Supply(Es=∞)
0
2
4
6
8
10
12
14
16
10 20 30 40
Supply Curve
Supply Curve
Supply
P
r
i
c
e