The buyers are able to buy a commodity only when it is available in the market. A commodity must be produced first, stored properly and transported to the market in order to be available for the buyers. Buyers buy these items from the sellers in the market. The original producer and the seller in the market could be the same person or different persons. If they are different, it simply means that the sellers in the market have procured these items from the original producers to sell them to the buyers in the market.
The production unit in which production of a commodity takes place is called a firm. Firms supply the commodities.
Meaning of Supply
Supply of a commodity is the quantity of the commodity that a seller offers for sale at a given price at a given time. The definition of supply includes the following three things:
- The quantity of a commodity offered for sale by a seller.
- The price of the commodity given in the market at which the seller is willing to sell that quantity of the commodity.
- The time period during which the seller is willing to sell that quantity of the commodity.
Stock and Supply
The total quantity of a commodity available with a seller or firm at a particular point of time is called stock. On the other hand supply is that part of stock of the commodity that the seller is ready to sell at some given price during a given time period. So supply is a flow. Stock is measured at a particular point of time whereas supply is measured over a period of time.
Factors affecting Individual Supply
The most important factors are:
- Price of the commodity
- Technology of production
- Price of inputs
- Price of other related goods
- Objective of the firm
- Government policy
1. Price of the commodity
Price of the commodity is an important determinant of supply of a commodity. When a producer produces a commodity he incurs a lot of expenditure on factors of production and raw materials. He can recover these costs by selling the product at certain price in the market. Since price is also the average revenue, higher the price higher will be the average revenue and accordingly higher will be total revenue. So price is a very important determinant of supply.
2. Technology of production
An improvement in technology of production reduces the cost of production per unit of the commodity which increases the margin of profit of the firm. This induces the firm to supply more of the commodity with the use of improved technology. On the other hand if a firm uses old and inferior technology; it increases the cost of production per unit of the commodity and reduces the margin of profit which leads to decrease in supply of the commodity.
3. Price of inputs
Suppose a firm is producing ice cream. If the price of milk falls, the cost of production per unit of ice creams will fall. It will lead to increase in margin of profit per unit. So, the firm will increase the supply of ice cream. On the other hand, if the price of milk increases, cost of production per unit of ice cream will increase. It will lead to decrease in margin of profit and firm will decrease the supply of ice cream.
Thus, if price of any input used in production of a commodity falls, it leads to decrease in cost of the production per unit and as a result supply of the commodity will increase. On the other hand, an increase in price of any input used in production of a commodity increases cost of production per unit and decreases supply of the commodity.
4. Price of other related goods
Supply of a commodity is also influenced by the price of other related goods. If the price of rice increases, it will be more profitable for the farmer to produce more of rice. The farmer will divert his resources from production of wheat to production of rice. As a result the supply of rice will increase and that of wheat will decrease. On the other hand, a fall in price of rice will result in decrease in supply of rice and an increase in supply of wheat.
5. Objective of the firm
Different firms have different objectives. Some firms have an objective to maximise their profits whereas some may have an objective of maximising sales. Some other firms may have an objective to increase their goodwill or prestige and some may have an objective of increasing employment opportunities. A firm having an objective of increasing sales may supply more of a commodity even at a lower price. Thus supply of a commodity is influenced by the priority given to the objective by the firm and readiness to sacrifice the one for the other.
6. Government policy
Government policy also influences the supply of a commodity. For example if the government increases the rate of value added tax or sales tax on a commodity, it will increase the cost of production per unit which will decrease the supply of the commodity. On the other hand, a reduction in the tax on a commodity will decrease cost of production per unit and increase the supply of the commodity.
Law of Supply
The six major factors determining supply of a commodity are price of commodity, price of other related goods, price of inputs, technology of production, objective of the firm and government policy. A change in any one or all of these factors may lead to change in the quantity supplied of the commodity.
Suppose we want to know the manner in which the quantity supplied of a commodity changes due to change in one of the factors. Consider the effect of change in price of the commodity on its quantity supplied assuming that all other factors such as price of other related goods, price of inputs, technology of production and government policy remain constant or do not change at this time.
The relationship between price and quantity supplied, when all factors other than price of the commodity remain constant, is given by the law of supply. All other factors determining supply remaining constant, the price of a commodity and its quantity supplied are directly related.
The diagrammatic representation of law of supply is called the supply curve. Thus, supply curve shows different quantities of a commodity supplied at different prices per unit of time in diagrammatic form.
According to the law of supply when other factors determining supply remain constant, a firm offers more quantity of a commodity for sale at a higher price and less of it at a lower price. Due to this direct relationship of price and quantity supplied of the commodity, the supply curve is upward sloping. This means that the supply curve which looks as a straight line, starts from a point closer to the origin and then moves up towards right.
The following factors are responsible for upward slope of the supply curve:
- A rise in price of the commodity causes rise in profits, as a result firms are induced to supply more quantity of the commodity to increase profit.
- A rise in price of the commodity induces the seller to dispose of at least a part of his stock. The reverse happens when there is a fall in price of the commodity.
- An increase in the price of the commodity causing higher profit attracts the new firms to enter the market and this adds to the supply of the commodity leading to more quantity supplied at a higher price.
The total quantity of a commodity supplied by all the firms in the market at a given price at a given time is called the market supply of that commodity.
Like an individual supply schedule, the market supply schedule of a commodity is the sum of the quantities of the commodity supplied by all the firms in the market at different prices. in case of individual firm or seller, when price of the commodity increases, the quantity of the same increases and when the price decreases the quantity decreases as per law of supply. Similarly all other firms or sellers in the market will also increase or decrease their respective quantities. Accordingly there will be different quantities supplied at different prices by all firms or sellers taken together in the market.
Factors determining Market Supply
All the factors which influence individual supply of a commodity also influence its market supply. In addition to these factors, the market supply of a commodity is also influenced by following two factors:
- Number of sellers or firms
- Expected future price
1. Number of sellers or firms
Market supply is an aggregate of all individual supply schedules in the market. If the number of firms increases, market supply will also increase. On the other hand, if number of firms decreases, the market supply will also decrease.
2. Expected future price
If the price of a commodity is expected to rise in the near future, the firm will supply less quantity of the commodity at present in expectation of higher profit due to rise in price in future. But if the price of a commodity is expected to fall in near future, firms will offer more quantity of the commodity for sale at present in expectation of less profit in future.