CHAPTER NO: 04

“THEORY OF SUPPLY” By Ms. Paras Channar

LECTURE OBJECTIVES
The meaning of Supply.
The Law of Supply
Movement VS Shift in Supply
Determinants of Supply
Backward Bending Supply Curve
THE MEANING OF SUPPLY
Supply of scare goods. It is the amount of commodity that sellers are able and
willing to offer for sale at different prices per unit of time.
In other words of Meyer “Supply is schedule of the amount of a good that would be
offered for sale at all possible prices at any period of time. e.g, day, week and so
on.” (source: Economics Books)
Supply is a fundamental economic concept that describes the total amount of a
specific good or service that is available to consumers. Supply can relate to the
amount available at a specific price or the amount available across a range of prices
if displayed on a graph. This relates closely to the demand for a good or service at
a specific price; all else being equal, the supply provided by producers will rise if the
price rises because all firms look to maximize profits. (Source: Investopedia)
In economics, supply is the amount of something that firms, consumers, laborers,
providers of financial assets, or other economic agents are willing to provide to the
marketplace. Supply is often plotted graphically with the quantity provided
(the dependent variable) plotted horizontally and the price (the independent
variable) plotted vertically. (Source: Wikipedia)
DISTINCTION BETWEEN STOCK AND SUPPLY
Supply refers to that quantity commodity which is actually brought into
the market for sale at a given price per unit of time. While stock is
meant the total quantity of a commodity which exists in a market, and
can be offered for sale at a short notice.
Supply and stock may or may not be equal, if the commodity is
perishable like fruits, vegetables and meat etc, than the supply and the
stock is generally the same. But in case of product which is storable, the
position is quite different. If the producer finds that the price of his
product is low as compared to its cost of production. He tries to hold
part or entire of the stock, in the case of favorable price, the producer
may dispose off larger quantities or the entire stock of his commodity, it
will all depend upon his own valuation of the commodity at that
particular time.
THE LAW OF SUPPLY
There is positive and direct relationship between price of good and quantity
offered for sale over a specified period of time. When the price of good rise
other things remain same, but the quantity offered for sale increase and as
price fall, the amount available for sale decrease. This relationship between
prices and the quantities which supplier are prepared to offer for sale is
called The Law of supply.
Graph representation:
 MARKET SUPPLY SCHEDULE:
Px 5 4 3 2 1

QxS 100 80 60 40 20

In the table above, the producer are able and

willing to offer for sale 100 units of a
commodity at price of $5. As the price falls,
the quantity offered for sale decreases. At
price of $1, the quantity offered for sale is
only 20 units.
In the figure (5.1) price is plotted on the vertical axis
OY and the quantity supplied on the horizontal axis
OX. The four points d, c, b, and a show each price
quantity combination. The supply curve SS/ slopes
upward from left to right indicating that less
quantity is offered for sale at lower price and more
at higher prices by the sellers not supply curve is
usually positively sloped.
 MOVEMENT VS SHIFT IN SUPPLY
MOVEMENT IN SUPPLY…
While explaining the law of supply we have stated that as price rise, the
quantity supplied increases and as price falls the quantity supplied decrease
and as price provided other things remain the same. This change in the
quantity supplied of a commodity is a movement of one price quantity
combination to another on the same supply curve. Such a movement at varying
prices is now illustrated with the help of the supply curve given in figure.
In the above figure (5.2) at price "aT" ($3.00), "aT" 50
units quantity is supplied. When price rises to
dL ($7.0), the quantity supplied by the
producers increases to OL (110 units).
The change in quantity supplied at
varying prices is referred as movement…
SHIFTS IN SUPPLY CURVE:
Shifts in supply curve means changes in supply. While explaining the law of
supply, we have stated that other things remaining the same, the amount of
the commodity offered for sale increases with the rise in price and decreases
with a fall in price. When there is an increase in supply due to one or more
than one non-price factor (which was held constant) such as production
techniques, resource prices, changes in the price of other commodities, etc.,
there is a rise in supply. The entire supply curve shifts to the right of original
supply curve indicating that more quantity is offered for sale at the same
price per time period.
If due to one or a combination of non-price factors, less quantity is brought
into the market for sale at each price, the supply is said to have fallen. In
case of fall in supply, the supply curve shifts to the left of the original supply
curve. The rise and fall of supply curve (shifts in supply curve) is explained
with the help of an imaginary schedule and a diagram.
 SCHEDULE OF SHIFTS IN SUPPLY CURVE:
SUPPLY SCHEDULE OF SHIFTS:
Price per Original Rise in supply Fall in supply
shirt quantity
(Dollars ) Supplied per
Week

50 200 320 140

40 160 200 100
30 100 150 70
20 39 100 15
CONT..
In the figures (5.3) SS/ in the original supply curve S2S2 to the right of the original
supply curve shows an increase in the quantity supplied at each price. S3S3 supply
curve to the left of original supply curve to the left of original supply curve indicates
a decrease in supply at each price over a specified period of time.
DETERMINANTS OF SUPPLY
The rise and fall in supply may take place on account of various
factors:
Change in Factor Prices: The rise or fall in supply may take place due to
changes in the cost of production of a commodity. If the prices of various
factor of production used in the production of a particular commodity increase
of it total cost of production. There will be reduction in the supply of that
commodity at each price because the amount demanded decreases with a rise
in price. Conversely, if the prices of the various factors of production fall
down, it will result in lowering the cost of production and so an increase in the
supply on varying prices.
CONT..
Change in Techniques: The supply of a commodity may also be affected by
progress in technique. If an improvement in technique takes place in a
particular industry, it will help in reducing its cost of production. This will result
in greater production and so an increase in the supply of the commodity. The
supply curve will shifts to the right of the original supply curve.
Improvement in means of Transport: The supply of the commodity may also
increase due to improvement in the means of communication and transport. If
the means of transport are cheep and fast, then supply of the commodity can
be increased at a short notice at lower price.
Climate Change in case of Agriculture Products: The supply of agricultural
products is directly affected by the weather conditions and the use of the
better methods of production. If rain is timely plentiful well-distributed; and
improve methods of cultivation are employed then other things remaining the
same, there will be bumper crops. It would then be possible to increase the
supply of the agriculture products.
CONT..
Political Changes: The increase or decrease in supply may also place due to political
disturbances in a country. If country wages wars against another country or some kind
of political disturbances take place just as we had at the time of partition, then the
channels of production are disorganized. It results in the decrease of certain goods
the supply curve shifts to the left of originals curve.
Taxation Policy: If a government levies heavy taxes on the import of particular
commodities, then the supply of these commodities is reduced at each price. The
supply curve shifts to the left .conversely if the taxes on output in the country are low
and government encourages the import of foreign commodities, then the supply can
be increased easily. The supply curve shifts to the right of originals supply curve.
Goals of Firms: If the firms expect higher profits in the future, they will take the risk
and produce goods on large scale resulting in larger supply of the commodities. The
supply curve shifts to the right.
BACK BENDING SUPPLY CURVE
"Wages can increase to a point where less labor is offered in the
market".
We have stated earlier those supply curves are positively sloped.
There can be sometime exceptions to the rule there is a backward
bending supply curve of labor as is illustrated in the following
schedule and a diagram.
Wage Rate (in Working Hour
Schedule: Dollars) (per day)
10 10
20 12
30 13
50 10
SCHEDULE AND GRAPH REPRESENTATION

Wage Rate (in Working Hour

Dollars) (per day)
10 10
20 12
30 13
50 10
CONT..
In the figure (5.4), a labor is willing to work for 10 hours a day at a wage
rate of $10 per hour. When the wage rate increases to $30 per hour, he puts
in 13 hours of work. If wage rise to $50, he then prefers leisure to work and is
willing to work for 10 hours only. The supply curve SS/ shows that a worker
puts in less labor when wage rate rises above $30 per hour. The supply of
labor then is negatively slopped and is backward bending.
The reasons of the backward bending supply curve of labor are:
(i) The substitution of leisure for work.
(ii) Increase in income which leads to rise in demand of normal commodities
including leisure.
HAVE A LOOK….
“The End”