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

Explicit cost and implicit cost.

Based on payment, costs are classified into two categories; they are Explicit Costs and Implicit Costs. Explicit cost is the cost which is actually incurred by the organization, during production. On the other hand, implicit cost, are just opposite to the explicit cost, as the organization does not directly incur them, but they are implied in nature which does not involve a cash payment. The former is an out of pocket cost, while the latter is an opportunity cost.

Explicit Cost

Explicit Costs are the costs which involve an immediate outlay of cash from the business. The cost is incurred when any production process is going on, or activity is conducted in the normal course of business. The cost is a charge for the use of factors of production like land, labour, capital and so on. They are in the form of rent, salary, material, wages, and other expenses like electricity, stationery, postage, etc.

Explicit Costs show that payment has been made to outsiders, while business is carried on. The recognition and reporting of the explicit cost are very easy because they are recorded when they arise. They show that an amount has been spent over a business transaction. They can be calculated in terms of money.

Recording of the explicit cost is very important because it helps in the calculation of profit as well as it fulfils purposes like decision-making, cost control, reporting, etc.

Implicit Cost

Implicit Cost, also known as the economic cost, is the cost which the company had foregone while employing the alternative course of action. They do not involve any outflow of cash from the business. It is the value of sacrifice made by the entity at the time of exercising some other action. The cost occurs when an asset is used as a factor of production by the entity instead of renting it out.