What is Supply ?
In economics supply is defined as the quantity of a particular product or service that suppliers offer to consumers at a specific price at a certain period of time.
Supply is a fundamental economic concept. It represents the total amount of a given product or serve available to consumers.
It is usually determined by market movement. For example, a higher demand may push a supplier to increase supply.
Definition :
Supply of a commodity refers to the quantities of a commodity which producers or sellers are willing to produce and offer for sale at various prices during a particular period of time.
The notion of supply is closely related to the concept of demand. The demand for the commodity can be defined as –
“The quantity of a commodity which a consumer is Willing and able to purchase at various prices during a particular period of time.”
Supply tend to increase if the price goes up because companies want to expand their production to meet the increasing demand.
Aspects of Supply:
There are three important aspects of supply which need to be noted :
1. Supply is desired quantity, i.e., how much producers are willing to sell and not how much they actually sell.
2. The second thing about supply is that supply is always expressed with reference to some price.
As demand for a commodity is always expressed at a price, similarly supply of a commodity is always expressed at a price. With a change in the price of a commodity, its supply will also change.
When the price of a particular product is low, the supply also tends to low. Supply increases with the rise in price. This is because companies mare always looking to gain more profit so they offer products at a higher price.
3. Like demand, supply is a flow variable. Therefore, supply refers to the amount which producers or sellers are willing to sell during a specific period of time – Per day, per week, per month or per year.
Supply can be individual or market supply.
Difference between Individual and Market Supply :
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Individual Supply |
Market Supply |
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Individual supply refers to the quantity of |
The quantity that all the producers are willing to |
How Supply is different from stock –
Supply should not be confused with the ‘stock’ of the commodity. Stock of a commodity is the total amount of the commodity available with the producers at any given time. While supply refers the amount which the producers are willing to offer for sale, in the market.
For instance, traders in food grains may have a large stock of food grains which they have built by purchasing food grains from the farmers immediately after the harvest season. The stock of food grains with them is the total amount of food grains with them. On the other hand the supply of food grains is that part of the food grains stock which they are prepared to bring into the market at a particular price.
Difference between Stock and Supply:
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S N |
STOCK |
SUPPLY |
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1. |
Stock of a commodity is the total amount of the |
Supply of a commodity does not comprise the entire |
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2. |
Stock is the intended supply or potential supply. The |
Supply refers to the amount which is actually |
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3. |
The concept of stock does not have any time |
The concept of supply has a time dimensions, it is |
Determinants of Supply / Factors Affecting Supply:
How much quantity of a commodity an individual firm or all the firms are willing to produce and offer for sale during a specific period of time is affected by a variety of factors. These are as follows:
1. Price of the commodity:
The most important factor influencing the supply of a commodity is its own price.
Given other things constant, the higher the price of the commodity itself, the larger will be the quantity supplied by the producers.
This is so because, as the higher the prices, given the per unit cost of production, the higher is the per unit profit. To increase the profit the producers will be motivated to increase the supply.
2. Goals of the Produces:
Goals or objectives of the firm also affect the supply.
Goals of the firm may be – ‘profit maximisation’, ‘sales maximisation’ or ‘risk minimisation’.
The higher is the profit from the sale of a commodity, the higher will be the amount supplied by the firm, and vice versa.
When the goal of the firm is to maximise sale, it will tend to increase the supply to dominate the market and to acquire higher status in business world.
Similarly, if the firm aim at minimising the risk, they will avert risk and produce and supply a smaller quantity of them commodity.
3. Input prices –
The price of the input factors such as – raw material, labour, machines etc also helps in determining the supply of them commodity.
If the producer have to pay higher price of the factors of production, the cost of production will be higher.
The higher cost of production reduces the profit margin.
The lower profit margin will reduce the production and then supply of the commodity offered for sale.
On the other hand, a fall in the input prices will increase the profit margin and hence the quantity produced for supply.
4. Price of related commodities :
If the price of related commodities like substitute are rising while the price of the commodity (to be studied) remains constant, then the producer will tend to produce its substitute so as to gain more profit.
Therefore the supply of the commodity will fall and the supply of its substitute will rise.
Thus the supply of a commodity varies inversely to a change in the price of a related good in production.
5. Techniques of Production:
Technique of production also exert a significant impact on the supply of a commodity.
The invention of new machines and advanced technique reduce the cost of An improvement in the technique of production, t production. This increase the profit margin thereby.
Increased profitability induces the producers to produce more and increase supply thereby.
6. Nature of Industry :
Supply of a commodity is also affected by whether the industry is monopoly or competitive.
In case of monopoly, one firm produces the entire commodity. A monopolist firm will like to restrict the output so as to raise the market price. Which reduces the supply.
But if there is competition among the firms, there will be no tendency to restrict the output.
Thus, the competitive firms are likely to produce and sell more as compared to monopolised industry.
7. Policy of Taxation and Subsidies :
Government policies of taxation and subsidies also affect the supply of a commodity.
Indirect taxes i.e., taxes imposed on commodities like sales tax, excise duty, Vat, etc. ares likely to increase the cost of production of the commodity.
Increased cost of production results in low profit margin generally leads to decrease in supply.
On the other hand, reduction of taxes, increase the profit margin and hence increase production and supply.
Similarly, government pays subsidies to firms to encourage them to produce certain goods. Subsidies reduce the cost of production and hence increase profit margin which induce the producers to increase supply.
8. Expectations about Future Price:
If the producers expect an increase in the price of a commodity in future, they will supply less today and hoard it to offer a large quantity in future at higher prices. This will decrease the supply today.
Conversely, if the producers expect a fall in the prices in future, they will increase the supply in present period.
9.Availability of Transport and Communication :
Availability of transport and communication will reduce the cost of production and increase the profit margin, this will lead to increase in supply.
An improvement in the transport and communication facility will expand the size of the market. Increased number of consumers will induce the producers to supply more.
Supply Function:
The supply function is a statement which states the relationship between the quantity supplied of a commodity and its determinants.
It may be written as :
Sn = f ( Pn, P1 …….Pn-1, Gf , Fi …….Fm, T, E, Gt, N, Mt….)
Where,
Sn = quantity supplied of good ‘n’
Pn = Price of good ‘n’
(P1…..Pn-1) = price of goods other than ‘n’
Gf = goal of firm
(Fi….Fm) = prices of different factors of production
T = Techniques of Production
E = expectations about future price
Gt = taxation policy of government
Mt = means of Transport
N = natural factors