SUPPLY ANALYSIS

What do you mean by supply? Or explain the concept supply.

Supply is one of the two forces that determine the value of goods in the market. If
economics were to be called price theory, it is partly due to the domination of supply and partly
due to the demand. Hence, the study of supply is as important as the study of demand.
In simple words, supply means the quantity offered for sale in the market at a particular
price during a given period of time. Supply is always at a price for a definite quantity in a
given period of time.
” Supply refers to the quantity of a commodity offered for sale at given price in a given
market at a given time -Anatol Murod
“The supply of goods is the quantity offered for sale in a given market at a given time
at various prices”- Thomas

Explain the concept law of supply.

The law is stated that,” other things remaining the same as the price of the commodity
rises, its supply is extended and as the price falls its supply is contracted”. This simply means
that as price rises supply increases and as price falls supply decreases in the market.
The supply varies directly with the price. In other words, the relationship between
supply and price is direct. Hence higher the price larger is the supply, lower the price smaller
is the supply.

What do you mean by supply schedule?

Supply schedule refers to the tabular representation of the relationship between the
price of a commodity and its relative quantity supplied in the market.
PRICE PER KG. QUANTITY
(RS) SUPPLIED (IN KGS.)
1 5
2 10
3 15
4 20
5 25

The schedule represents the prices and quantities offered for sale. As the price of potato
per kg. rises from Rs. 1 to Rs. 5, the quantity supplied increases f5rom 5 to 25 kg.

What do you mean by supply curve?

Supply curve represents the graphical representation of the relationship between the
price of a commodity and its quantity supplied.
In the figure, SS1 is the supply curve. It is positive and it slopes upward showing
increase in supply for every rise in price.

Write a note on changes in supply.

Extension and contraction in supply.

The most important factor which brings about changes in supply is the change in price.
In other words, with a rise in price, the amount supplied extends (expansion in supply) while
with the fall in price, the supply contracts (contraction in supply).

Extension in supply:
 Other things remaining the same, extension in supply refers to an increase in supply
due to increase in price. It is explained with the help of a schedule and a diagram.
PRICE EXTENSION IN SUPPLY
QUANTITY DESCRIPTION
1 1 INCREASE IN PRICE
5 5 INCREASE IN SUPPLY

In the above table, as the price of a commodity is Rs.1, quantity supplied is also1unit. Now as
the price of commodity increases to Rs.5, quantity supplied also increase to 5 units.

In the above figure, when the price of a commodity is Rs.1, supply of commodity is
also 1 unit and the producer is on point A of the supply curve. When the price increases to
Rs.5, quantity supplied of commodity also increase to 5 units and producer shift to point B of
the supply curve.
Contraction in supply:
Other things remaining the same, contraction in supply refers to a fall in supply due to
fall in price.

PRICE CONTRACTION IN SUPPLY

QUANTITY DESCRIPTION
5 5 DECREASE IN PRICE
1 1 DECREASE IN SUPPLY

The above table shows that when the price of commodity is Rs.5, quantity supplied is
also 5 units. Now as the price falls to Rs.1, quantity supplied also falls to 1 unit.

In the above figure, when the price of a commodity is Rs.5, supply of commodity is
also 5 units and the producer is on point A of the supply curve. When the price falls to Rs.1,
quantity supplied of commodity also falls to 1 unit and producer shift to point B of the supply
curve.
Increase and decrease in supply:
Increase in supply:
It refers to the increase in supply of commodity due to some other factors like over
production, reduction in cost of production, releasing of stock and others other than price of a
commodity.

In the figure, the price of commodity is constant represented by PP curve. The initial
supply curve is SS, there the equilibrium output (supply) is OQ at point E. Due to some reasons
(like increase in production (bumper crop)) the supply curve is shifted towards right, there the
new equilibrium output is OQ1 at point E1. This improvement in supply from OQ to OQ1 is
called increase in supply.
Decrease in supply:
It refers to decrease in supply of commodity due to some other factors like under
production, increase in cost of production, shortage of supply in the warehouses and others
other than the price of a commodity.

In the figure, the price of commodity is constant represented by PP curve. The initial
supply curve is SS, there the equilibrium output (supply) is OQ at point E. Due to some reasons
(like decrease in production (Crop failure)) the supply curve is shifted towards left, there the
new equilibrium output is OQ1 at point E1. The fall in supply from OQ to OQ1 is called
decrease in supply.

What are the factors determine or influence the supply of commodities in the market?
The following are some of the factors determine the supply of a commodity in the
market. They are,
Price of the commodity:
 The price of the commodity is the foremost important factor. As the price rises, sellers
like to sell more and more and vice versa because there are more chances of profit. Thus,
supply of a commodity depends on the price of it.
Price of the related goods:
Supply of a commodity is also influenced by the price of the related goods in the market.
If the price of the substitute goes up, producers are intended to direct their resources to the
production of the substitute commodity.
Cost of production:
With the rise in cost of production, generally supply tends to fall. It is because it pushes
up the price of the commodity.
New inventions:
Generally, development of technology and new inventions helps to raise productivity
and thus helps to raise the supply function.
Natural factors:
The favorable natural factors help to boost the production while unfavorable hinders it
and supply is adversely affected.
Development of transport and communication:
The supply of the commodity depends on the available facilities of transport and
communication. If the means of transport are used for the export, then it would adversely affect
the domestic supply.
Future expectations of prices:
If the sellers expect a fall in future prices, he will sell more at the current price. On the
other hand, if he expects a rise in future prices, he will sell at current price and hoard the
commodities.
Non economic factors:
Factors outside the economic sphere or some natural factors exercises great influence
on supply. Rain, draught, fire, air, earthquake and such other natural factors curtail future
supplies.

ELASTICITY OF SUPPLY:
Elasticity of supply means the rate at which the supply of a product changes to the
change in its price. Thus, it explains the responsiveness or the sensitiveness of supply to the
change in price.
Supply is said to be elastic when with a small change in price, there is a considerable
change in supply. The supply is said to be less elastic, when a big change in price leads to
small change in quantity supplied.
In brief,
Proportionate change in quantity supplied
ES = -----------------------------------------------------
Proportionate change in price

ES = ∆ Q/Q / ∆P/P

ES = ∆Q/∆Q × P/Q

What are the factors determines or influences the elasticity of supply of a commodity?
Period of time:
The supply of a commodity is less elastic in the short period than that in the long period.
This is because it is possible to increase supply much more in the long period than in the short
period.
Nature of the commodity:
Commodities may be perishable or durable. The supply of perishable commodities like
milk, vegetables and fish is inelastic in the market period (very short period). This is because
these cannot be stored or the cost of storage is very high. On the other hand, the supply of
durable commodities is relatively more elastic.
Market structure:
Elasticity of supply also depends very much on the type of market in which a
commodity is sold. Supply under perfect competition is more elastic than that under monopoly.
Economic situation:
Supply of a commodity is more elastic when there is a depression. This is due to the
reason that the factors of production are available in plentiful supply at low prices. The supply
is inelastic during boom conditions due to shortage of resources.
Development of means of transport and communication:
With the construction of roads and railways in an area, the cost of production of
marketing a product goes down. This helps in stepping up supply even at the existing price.
Hence development of means of transport makes the supply more elastic.
Technical development:
When there is a technical development in an industry, it leads to fall in costs. This
makes it possible to raise supply at the prevailing price. For instance, hybrid seeds of wheat
led to rise in yields per acre. It made the wheat supply highly elastic.

What are the importance of the concept elasticity of supply?

The elasticity of supply has manifold significance. Some main points of its importance
have been focused as;
Effect on price:
The elasticity of supply is useful to assess the effect of price when the demand for a
commodity increases. The more elastic is supply, the smaller the rise in price. This tempts the
seller to offer more commodities for sale.
Quasi – rent:
In order to understand the quasi-rent which one enjoys, elasticity of supply helps to
make a difference between short run elasticity of supply and long run elasticity of supply.
Economic planning:
Knowledge of elasticity of supply is useful to understand the concept of economic
planning specially in less developed countries.