Unit 5 5 7

Consumer goal of the producer may be to maximize total profits or to maximize
Behaviour and sales or to capture the market in the long run.

the Demand
Theory
If a producer wants to earn maximum profits, he will plan to produce that
quantity of output which gives him the maximum profit. It does not
imply that he cannot produce more but he will not do so because
producing more may reduce his profit. Now suppose that the goal of the
producer is to maximize sales rather than profits. In that situation he may
set a target of less than maximum profits in the short run. He will go on
increasing his supply as long as his target is not adversely affected. The
goal of maximization of sales is promoted by the desire of the firm to
maximize profits in the long run. Similarly, if producers are reluctant to
take risks, we would expect smaller production and supply of any
commodity which carries more risk.
6) Other factors: There can be many other factors influencing supply.
Some of other factors are expected changes in government policy, fear of
war, unexpected climatic conditions, expected change in prices, growing
inequalities of income influencing the demand of particular types of
goods and hence making them more profitable to produce.
5.3 THE LAW OF SUPPLY

Let us assume that the overall objective of a producer is to maximize profits
which is the difference between total revenue and total cost. Total revenue is
the price of the product multiplied by the quantity sold. Total cost is the
average cost of production multiplied by the quantity produced.
PROFIT
= TR – TC (1)
TR = Q. P (2)
TC = Q.AC (3)
A higher price would mean more profits, provided there is no change in other
factors influencing the supply. Therefore, a producer will be willing to supply
more if he expects to get a higher price for his product. Similarly, a producer
will be willing to supply less if he expects to get a lower price for his product.
So, we observe a direct relationship between the price and the quantity
supplied of a commodity. This direct relationship between price and supply
of a product is referred to as the ‘Law of Supply'. The law states that as the
price of a commodity increases, the quantity supplied, per unit of time,
of that commodity also increases and vice versa, assuming all other
factors influencing supply remain constant. The law of supply holds good
only on the assumption 'other factors remaining constant. In this direct
relationship between the price and the supply of a commodity, the change in
supply is caused by the change in price such that change in price is the cause
and change in supply is the effect. We can state the same thing differently by
122 saying that price is taken as an independent variable while supply is taken to
be a dependent variable. It is important to understand that the statement Law of Supply
“Price rise leads to supply rise” is true and the statement that “Supply rise and Elasticity of
Supply
leads to price rise” is false.
5.3.1 The Supply Function

The supply function is a shorthand expression of the various factors affecting
supply of a commodity. Thus, the supply of a commodity can be put as a
function of price of that commodity, the price of all other commodities; the
prices of factors of production, technology, the objectives of producers and
other factors. This relationship must be expressed with the help of following
symbols.
QS = f(P1, P2, P3.... Pn, F1... Fn T, O, OF where QS stands for the supply of
commodity ……P1 is the price of that commodity, P2, P3...Pn are the prices of
all other commodities, F1………Fn are the prices of all factors of production.
T is the state of technology, O is the objective of the producer and OF stands
for other factors influencing supply.
In the Law of Supply, we are only concerned with the relation between Q, S
and f(P1), other things remaining constant. In specific terms, what we state in
the law of supply is that the quantity of a commodity produced and offered
for sale will increase as the price of the commodity rises and decreases as the
price falls, other things remaining constant.
5.3.2 The Supply Schedule

A supply schedule shows different prices of a commodity and the quantities
which a producer is willing to supply, per unit of time, at each price,
assuming other factors influencing the supply to be constant. A supply
schedule of a product based on imaginary data is given in Table 5.2
illustrating the relationship between price and quantity supplied as given by
the law of supply.
Table 5.2:A Supply Schedule of a Pen Producer
Price (in Rs.) Quantity Supplied

per pen (in thousand) per month
2 25
3 40
4 50
5 60
6 70
The schedule presented in Table 5.2 shows that at a price of Rs 2 per pen the
producer is willing to supply 25 thousand pens per month. And at a higher
price of Rs 3 per pen he is willing to supply 40 thousand pens per month and
as price of pens keep rising he is willing to supply more and more quantity of
pens per month as shown in the supply schedule. This supply schedule has
123
Consumer been so drawn as to depict a direct relationship between price per pen and
Behaviour and quantity supplied of pens per month.
the Demand
Theory
5.3.3 The Supply Curve
Look at Figure 5.1, where the data from Table 5.2 has been plotted. Here
price is plotted on the Y-axis and quantity supplied on X-axis.
Figure 5.1: Supply Curve
The graph shows that point labelled a, for example, gives the same
information that is given on the first row of the table; when the price of pens
is Rs 2 per pen, 25,000 pens will be produced and offered for sale per month.
Similarly, points b, c, d, and e on the graph correspond to row 3rd, 4th, 5th
and 6th of table 5.1 respectively. The supply curve S is a smooth curve drawn
through the five points a, b, c, d and e. This curve shows the quantity of pens
that will be produced and offered for sale at each price.
In short, the supply curve for a product depicts the direct relation between the
price of that commodity and the quantity producers wish to produce or sell at
that price. This curve is drawn on the assumption that all other factors (other
than the price of the product) that influence supply are constant (i.e. they
remain unchanged). The upward slope of the supply curve indicates that the
higher the price, the greater the quantity producers will supply. If the supply
curve is extended to the Y-axis, it may or may not pass through O. If it passes
through O, it shows that the quantity supplied is zero at zero price; if it does
not pass through zero, it shows that unless the price 'rises upto a point,
(indicated by a point not shown in the Figure 5.1 at which supply curve cuts
the Y-axis) quantity supplied will remain zero. The upward sloping supply
curve is just a diagrammatic representation of the law of supply.
124

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Consumer goal of the producer may be to maximize total profits or to maximize

Behaviour and sales or to capture the market in the long run.

5.3 THE LAW OF SUPPLY

5.3.1 The Supply Function

5.3.2 The Supply Schedule

Table 5.2:A Supply Schedule of a Pen Producer

Price (in Rs.) Quantity Supplied

Figure 5.1: Supply Curve

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