THEORY OF SUPPLY

SUPPLY
Supply of a commodity refers to a schedule(or a table)showing various quantities of a commodity that the producers are willing to sell at different possible prices of the commodity at a point of time.

QUANTITY SUPPLIED
Quantity supplied refers to a specific amount offered for sale at a specific price of the commodity.

INDIVIDUAL SUPPLY AND MARKET SUPPLY

Individual supply refers to supply of a commodity by an individual firm in the market.
25 20 15 10 5 0

PRICE OF ICE CREAM (RS)

QUANTITY SUPPLIED(UNIT S)

Series 1
5 10 Series 1 15 20 0 10 20 30

MARKET SUPPLY
Market supply refers to supply of a commodity by all the firms in the market. PRI CE OF ICE CRE AM (RS)
5 10 15 20 35 30 25 20 15 10 5 0 Category Category Category Category 1 2 3 4 O 5 10 20 O 15 30 50 Series 1 Series 2

SUPPL Y BY FIRM A (UNIT S)

0 1O 20 30

SUPPLY MARKET BY FIRM SUPPLY(U B NITS) (UNITS)

Series 3

SUPPLY FUNCTION
Supply function studies the functional relationship between supply of a commodity and its various determinants. The supply of a commodity mainly depends on the goal of the firm, price of the commodity, price of related goods, price of factors of production and state of technology.

FOLLOWING IS A BRIEF EXPLANATION OF THE VARIOUS DETERMINANTS OF SUPPLY OF A COMMODITY.

PRICE OF THE COMMODITY PRICE OF RELATED GOODS NUMBER OF FIRMS GOAL OF THE FIRM PRICE OF FACTORS OF PRODUCTION CHANGE IN TECHNOLOGY EXPECTED FUTURE PRICE GOVERNMENT POLICY

LAW OF SUPPLY
The law of supply states that other things remaining constant ,quantity supplied of a commodity increases with increase in the price and decreases with a fall in its price.
PRICE(RS)
10 11 12

SUPPLY(U NITS)
100 200 300

 There is no change in the prices of the factors of production. There is no change in the technique of production. There is no change in the goal of the firm. There is no change in the prices of related goods. Producers do not except change in the price of the commodity in the near future.

ASSUMPTIONS OF THE LAW OF SUPPLY

 The law of supply does not apply strictly to agricultural products whose supply is governed by natural factors.If due to natural calamities ,there is a fall in the production of wheat,then its supply will not increase ,however high the price may be. Supply of goods having social distinction will remain limited even if their price tends to rise. Sellers may be willing to sell more units of a perishable commodity at a lower price.

EXCEPTIONS TO THE LAW OF SUPPLY

Change in quantity supplied and change in supply

CHANGE IN QUANTITY SUPPLIED
CHANGE IN QUA NTITY SUPPLIED

EXTENSION OF SUPPLY

CONTRACTION OF SUPPLY

CHANGE IN SUPPLY

CHANGE IN SUPPLY

INCREASE IN SUPPLY

DECREASE IN SUPPLY

CAUSES OF INCREASE IN SUPPLY

Improvement in technology Reduction in the price of factors of production causing fall in cost of production Decrease in price of a competiting good Increase in number of firms in the market Expected fall in price of the commodity in near future Shift in goal of the firm from profit maximisation to sales maximisation

CAUSES OF DECREASE IN SUPPLY

Use of outdated technology Increase in price of factors of production causing increase in cost of production Increase in price of a competing good Decrease in number of firms in the market Expected rise in price of the commodity in the near future Shift in goal of the firm from sales maximisation to profit maximisation

PRICE ELASTICITY OF SUPPLY

Price elasticity of supply is a measurement of percentage change in quantity supplied of a commodity in response to some percentage change in its price.

MEASUREMENT OF PRICE ELASTICITY OF SUPPLY

PROPORTIONATE METHOD Elasticity of supply ,is the ratio between PERCENTAGE CHANGE IN QUANTITY SUPPLIED and PERCENTAGE CHANGE IN PRICE of the commodity

Q Initial quantity P Initial price Q Change in quantity supplied P Change in price of the commodity

FACTORS AFFECTING ELASTICITY OF SUPPLY

Nature of the inputs used Natural constraints Risk taking Nature of the commodity Cost of production Time factor Technique of production

THANK YOU
Submitted by: Sahil Sharma