Time Period: Market Period, short Run and Long Run
Economists distinguish between different types of supply curves based on the way supply responds to a change in price over time. We may divide time into the following three periods on the basis of supply response to change in price :
1. Market Period
2. Short Run
3. Long Run
1. Market Period:
The market period is very short period in which the supply of a commodity is fixed.
The maximum supply in the market period is the stock of the good which has already been produced.
The time period is so short that supply is not responsive to demand.
In this period the price of the commodity is determined by the variations in demand.
This market period may be an hour, a day, a few days or even a few weeks depending upon the types of commodity under consideration.
The market price is the price prevailing in the market period and this price is not fixed. The market price fluctuates many times depending upon the nature of the commodity and demand.
The supply of perishable goods falls under this period.
Since supply of a commodity is fixed and can not be altered in this case, the supply curve of each firm is a vertical straight line.
As the individual supply curve is a vertical straight line, the market supply curve that is obtained by aggregating all individual supply curves must also be vertical straight line.
Hence in the case of perishable commodities such as fish, milk, vegetable, flower etc.,the supply curve is vertical straight line and the supply is perfectly inelastic.
A Vertical Supply Curve of Perishable Commodity :
Example Vegetables: Once the vegetables have been grown brought to the vegetable market, there can not be any change in the supply of vegetables, no matter what the price is.
The firm can not adjust their output to any change in price. Hence the supply curve is perfectly inelastic.
2. Short Run Period:
The short run is a period in which supply can be adjusted to some extent.
The short period has been defined by Stigler as “The period in which the rate of production is variable, but in which there exist a fixed plant.”
In the short run, the fixed factors like machinery, plant etc.,cannot be altered. Variable factors like number of labours or their working hours can be increased or decreased according to the changes in demand.
Producers can increase production by running the existing plant for longer hours like two shifts instead of one shift.
Short run is not long enough for the firms to set up new plants or new machines. This short run supply can be increased to a limited extent. Thus short run supply curve is an upward sloping S2S2 curve.
Short run supply Curve
Long Run Period:
The long period is of many years in which supply can be fully adjusted to demand.
It is possible to bring about a large change in quantity supplied in the long run.
As the variable as well as fixed factors like – machinery, equipment, plants can be altered or replaced by the new. New firms can enter the industry and old firms can change the management or close down.
Thus, supply can be adjusted to demand in every possible way in the long run.
The long period price is also known as the normal price. The supply curve for long run is a flatter supply curve:
A long run Supply Curve:
Exception of Law of Supply:
According to the law of supply, when the price of a commodity increases, the supply of the commodity also increases and when the price of the same commodity falls, the supply of that commodity also falls.
It means there is a direct relationship between the price of the commodity and its supply and an ideal supply curve is positively sloped or upward sloped.
But there are certain conditions where the law of supply is not applicable, and the supply curve is not positively sloped, these conditions are known as exception to the law of supply. In such cases, the supply of the commodity falls with the increase in the price of the commodity at a particular point of time.
The exceptional supply curve may be vertical or backward sloping curve or any repressive supply curve.
1. Vertical Supply Curve / Supply Curve of Rare Goods:
There are certain commodities the supply of which can not be increased or decreased at all. In such cases the quantity supplied remains unchanged and fixed at all possible prices.
Such commodities are rare goods or art work of a dead painter or non – reproducible goods like old classical paintings, old manuscripts, rare postage stamps, old coins etc.
Since supply is fixed at all possible prices, supply curve becomes perfectly inelastic. Thus, in short run the supply curve is illustrated as a vertical line SS, parallel to the Y – axis:
A vertical Supply Curve
2. Backward Sloping Supply Curve / Labour Supply Curve:
The law of supply fails in the case of labour supply curve. The labour supply curve is backward sloping. This means that a smaller quantity would be offered at a higher price than at a lower price.
Backward sloping labour supply curve:
A backward sloping/labour Supply Curve
In the given figure, when the price is OP, the supply of the product is OQ.
But when the price rises to OP1, the supply falls to OQ1.
As a result the supply curve has a negative slope beyond point T.
Labour Supply Curve: explanation
In case of labour supply ( supply being expressed in terms of number of hours worked) the supply curve is backward sloping.
As wage rate (the price of labour) increases, the workers work for more hours initially so as to earn more income. He prefers labour to leisure.
When the price of labour ( wage rate) is further increased, at a very high rate, the worker may be willing to work for fewer hours so as enjoy more leisure. At this much high rate, the worker prefers leisure to work as he may have earned enough income.
As a result, the supply curve of labour becomes backward bending.
3. Anticipation of fall in price:
If the firms anticipate that the product prices will fall much in near future, they may dispose of the product at even lower price, in order to clear their stocks.
In such conditions the supply curve is not upward sloping it becomes downward.
Such possibility may arise in the short run.
4. Negative Sloping Supply Curve in the Share Market:
In the share market the supply curve is negative sloping.
As the share market is characterised by uncertainty, people anticipate the change in prices of shares.
When the price of a share falls, people expect that its price will fall furthermore.
In view of this expectations and anticipation regarding future price of shares they sell more (less) now when its price falls (rises) .
This means that the supply curve for such shares is downward sloping one.
5. When leaving the Industry :
If the firm wants to shut down or close down their business, they may sell their products at a price below their average cost of production.
6. Agricultural Output:
The law of supply does not apply to agricultural goods as their production depends on climatic conditions.
If due to unforseen changes in weather, the production of agricultural product is low, then their supply can not be increased even at higher prices.