Supply:
Supply means the various amounts of the
commodity, other things remaining constant, the sellers are willing and able to
sell at different prices at any moment of time or during any one period of
time. In other words of prof. Bach, “Supply is a schedule of amounts that will
be offered for sale at different prices during any given time period, other
factor remaining unchanged.” The amount of commodity which sellers are willing
to sell depends upon a number of factors like price of that commodity, prices
of factors of production, state of technology, supply of co-operant factors
etc. But for our purpose, supply is taken as function of price alone, all other
factors remaining the same.
The
law of supply states that the
quantity of a good offered or willing to offer by the producers/owners for sale
increase with the increase in market price of the good and fall if the market price
decreases, all other things remaining unchanged. The law of supply establishes
a direct relationship between price and quantity supplied i.e. the higher the
price, the larger is the supply; the lower the price, the smaller is the
supply.
A supply curve
is a graphical representation of the relationship between the amount of a
commodity that a producer or supplier is willing to offer and the price of the
commodity, at any given time. In other words, a supply curve can also be
defined as the graphical representation of a supply schedule.
In a graph, the price of the commodity is shown on the
vertical axis (Y-axis) and the quantity supplied is shown on the horizontal
axis (X-axis) of the graph. It is an upward slope, which means higher the
price, higher will be the quantity supplied, and lower the price, lesser will
be the quantity supplied.
The supply curve slopes upwards from left to right showing
that price and quantity supplied move in the same direction. A supply curve can
be a straight line or a curve.
Movement along a supply curve
The amount of commodity supplied changes with rise and fall
of the price while other determinants of supply remain constant. This change,
when shown in the graph, is known as movement along a supply curve.
In simple words, movement along a supply curve represents
the variation in quantity supplied of the commodity with a change in its price
and other factors remaining unchanged.
The
movement in supply curve can be of two types – extension and contraction.
Extension in a supply curve is caused when there is an increase in the price or
quantity supplied of the commodity while contraction is caused due to a
decrease in the price or quantity supplied of the commodity.
Fig: supply curve
In the above fig., let us suppose Rs. 20 is the original
price of milk per liter and 20,000 liters is the original quantity of supply.
When the price rises from Rs. 20 to Rs. 30, the amount of quantity supplied
rises from 20,000 liters to 30,000 liters, and there is a movement in the
supply curve from point B to point C. This movement is known as an extension of the supply curve.
Similarly, when the price falls from Rs. 20 to Rs. 10, the
amount of quantity supplied falls from 20,000 liters to 10,000 liters, and
there is another movement in the supply curve from point B to point A. This
movement is known as a contraction of
the supply curve.
Shift in supply curve
While
defining the law of supply, we assume “other things remain unchanged”. This
phrase implies that there is no change in the methods of production,
availability of other inputs, climate and weather conditions, cost of
production and all other variables which exert their influence on supply. Thus,
we normally maintain that other things remaining the same, the law of supply
holds good. But other things seldom remain the same. A change in ‘other things’
will be attended by either an increase in supply or decrease in supply.
Shift in the supply curve is also sometimes referred as a
change in supply. The amount of commodity that the producers or suppliers are
willing to offer at the marketplace can change even in cases when factors other
than the price of the commodity change. Such non-price factors can be the cost
of factors of production, tax rate, state of technology, natural factors, etc.
When the quantity of the commodity supplied changes due to
change in non-price factors, the supply curve does not extend or contract but
shifts entirely. For an instance, the introduction of improved technology in
industries helps in reducing the cost of production and induces production of
more units of a commodity at the same price. As a result, the quantity of
commodity supplied increases but the price of the commodity remains as it is.
Fig: shift in supply curve
The shift in supply curve can also be of two types –
rightward shift and leftward shift. The rightward shift occurs in supply curve
when the quantity of supplied commodity increases at same price due to
favorable changes in non-price factors of production of the commodity.
Similarly, a leftward shift occurs when the quantity of supplied commodity
decreases at the same price.
In
the above fig., let us suppose that SS is the original supply curve where Q
amount of commodity has been supplied at price P. Due to favorable changes in
non-price factors, the production of the commodity has increased and its supply
has been increased by Q2 – Q amount, at the same price. This has
caused the supply curve rightwards and new supply curve S2S2 has
formed.
In the same, due to unfavorable changes in non-price
factors of the commodity, the production and supply have fallen to Q1
amount. Accordingly, the supply curve has shifted leftwards and new supply
curve S1S1 has formed.
Reasons for rightward shift of supply curve
• Improvement
in technology
• Decrease
in tax
• Decrease
in cost of factor of production
• Favorable
weather condition
• Seller’s
expectation of fall in price in future
Reasons for leftward shift of supply curve
• Use
of old or outdated technology
• Increase
in tax
• Increase
in cost of factor of production Unfavorable weather
condition
• Seller’s
expectation of rise in price in future
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