Chapter discussing Supply and its concepts

1. Supply Analysis

2. What is Supply?
• The supply of a commodity may be defined as the amount of that
commodity which the sellers are able and willing to offer for sale at a
particular price during a certain period of time.
• The ability of the seller to supply a commodity depends on the stock
available with him.
• A sellers willingness to supply a commodity depends on the difference
between the reservation price and prevailing market price.

3. Supply and Stock
• Supply and stock are related but distinct terms.
– Supply comes out of stock i.e it is the amount
of stock offered for sale at a price.
– Stock determines the potential supply.
– Stock is the outcome of production.

4. Determinants of supply
• Other than price the determinants of supply are
– The cost of factors of production.
– The state of technology
– Factors outside the economic sphere.
– Tax and subsidy.

5. Supply Function
• In the supply function the determinants can be summarized as
follows:
– Sx=f(Px, Pf, O, T, t, s)
• Px= Price of the commodity x
• Pf= Price of the factors of production
• O= factors outside the economic sphere
• T= Technology used
• T= Taxes
• S=Subsidies.

6. Law of Supply
The law of supply states that other things remaining
unchanged the supply of a commodity rises with the
rise in price and falls with the fall in price.

7. Extension and Contraction of Supply
• The law of supply refers to change in supply due to change in
price.
• If with a rise in price the supply rises it is extension of supply.
• If with a fall in price the supply falls it is contraction of supply.

8. Increase and decrease in supply
• At times there might be more supply forthcoming in the
market without change in price it is called increase in supply.
• If there is less supply forthcoming in the market without a
change in price it is called decrease in supply.

9. Causes for change in Supply
• Cost of production
• Supply also depends on natural factors
• Change in techniques of production
• Policy of government influences supply
• Development of transport
• Business combines

10. Elasticity of Supply
• The degree of responsiveness of supply of a product in the
market to a change in its price is called elasticity of supply.
• When with a little change in price there is considerable change
in supply the supply is said to highly elastic.
• When with a considerable change in price there is little change
in supply the supply is said to less elastic.

11. Factors determining Elasticity
• The nature of the commodities:
– Perishable commodities the supply is less elastic
– Durable commodities the supply is more elastic
• Time period:
– In the short run supply is relatively inelastic
– In the long run supply is relatively elastic.

12. • Scale of production:
– Goods produced in small scale have relatively inelastic supply
– Goods produced in large scale have relatively elastic supply.
• Technique of production:
– When capital intensive technique is used in production
supply tends to be more elastic.
– When labor intensive techniques are used the supply tends
to be less elastic.

13. • Size of the firm and the number of products produced:
– Big firms produce a variety of products at a time, they can
easily transfer the resources from one product to the other
so that supply becomes more elastic.
• Natural Factors.
• Nature of production.

14. • Mobility of factors:
– In industries with high degree of mobility of factors of
production supply will be more elastic.
– Immobility of factors causes inelasticity of supply.