Determinants and Law of Supply: A Comprehensive Guide
Determinants of Supply:
1) Price of commodity:
Price is an important
factor influencing the supply of a commodity. More quantities are supplied at a higher price and less quantities are supplied at a lower price. Thus, there is a direct relationship between price and quantity supplied.
2) State of technology Technological improvements reduce the cost of production which lead to an increase in production and supply.
increases, the cost of production also
increases, as a result, supply decreases.
4) Infrastructural facility: Infrastructure in the form of transport, communication, power, etc. Influences the production process as well as supply. Shortage of these facilities decreases the supply and vice versa.
5) Government policy Favourable
Government policies may encourage supply and unfavourable government policies may discourage the supply. Government policies like taxation, subsidies, industrial policies, etc. May encourage or discourage production and supply, depending upon S = Supply government policy measures.
6) Natural conditions: The supply of
agricultural products depends on the natural conditions. For example, a good monsoon and favourable climatic condition will produce a good harvest, so the supply of agricultural products will increase and unfavourable climatic conditions will lead to a decrease in supply.
7) Future expectations about price : If the prices are expected to rise in the near future, the producer may withhold the stock.
This
8) Other factors: It includes
, nature of the market,
relative prices of other goods,
export and imports,
industrial relations,
availability of factors of production etc. If all factors are favourable, supply of a commodity will be more and vice versa
Law of Supply
Introduction:
The law of supply is also a fundamental principle of economic theory like law of demand. It was introduced by Prof. Alfred Marshall in his book, ‘Principles of Economics which was published in 1890. The law explains the functional relationship between price and quantity supplied.
Statement of the Law:
“Other things being constant, higher the price of a commodity, more is the quantity. Supplied and lower the price of a commodity less is the quantity supplied”
In simple words, “other factors remaining constant, a rise in price results in a rise in the quantity supplied and vice-versa. Thus, there is a direct relationship between price and quantity supplied.
Symbolically,
Sr = f(Px)
S-Supply
x = Commodity
f-Function
P-Price of commodity
Assumptions of the law: The law of supply is based on the following
assumptions:
1) Constant cost of production: It is assumed that there is no change in the cost of production A change in cost of production will affect the profits of the seller. Therefore less quantity will be supplied at the same price.
2)
Constant technique of production: It is also assumed that technique of production does not change. Improved technique of production may lead to an increase in production. This in turn may lead to an increase in the supply at the same price.
when price rises supply also rises and when price falls supply also falls. Thus, there is direct relationship between price and quantity supplied which is shown in following figure 4.4:
Supply Curve
Ye
50
40
30
3) No change in weather conditions: It is assumed that there is no change in the weather conditions. Natural calamities like floods, earthquakes etc. May decrease supply.
4) No change in Government policy: It is also assumed that government policies like taxation policy, trade policy etc. Remain unchanged.
5) No change in transport cost: It is assumed that there is no change in the condition of transport facilities and transport cost. For example, better transport facility increases supply at the same price.
6) Prices of other goods remain constant: Prices of other goods are assumed to remain constant. If they change, the law of supply may not hold true because producer may transfer resources to other products.
7) No future expectations: The law also assumes that the sellers do not expect future changes in the price of the product.
Law of supply is explained with the help of the following schedule and diagram: Table 4.3
Supply Schedule
Price of commodity x (int)
10 20 30 40 50
Supply of commodity x
(in kgs.)
100 200 300 400 500
Table 4.3 explains the direct relationship between price and quantity of commodity supplied. When price rises from 10 to 20, 30, 40 and 50, the supply also rises from 100 to 200, 300, 400 and 500 units respectively. It means
In the figure 4.4, X axis represents quantity supplied and Y axis represents the price of the commodity. Supply curve ‘SS’ slopes upwards from left to right which has a positive slope. It indicates a direct relationship between price and quantity supplied.
Exceptions to the Law of Supply: Following are the exceptions to the law of supply:
1) Supply of labour: Labour supply is the total number of hours that workers to work at a given wage rate. It is represented graphically by a supply curve. In case of labour, as the wage rate rises the supply of labour (hours of work) would increase. So supply curve slopes upward. Supply of labour (hours of work) falls with a further rise in wage rate and supply curve of labour bends backward. This is because the worker would prefer leisure to work after receiving higher amount of wages. Thus, after a certain point when wage rate rises the supply of labour tends to fall.
It can be explained with the help of a backward bending supply curve. Table no. 4.4 and fig. No 4.5 explains the backward bending supply curve of labour.
Stock & Supply
Stock is the total quantity of goods available for sale Supply refers to the quantity of goods that a seller is able with a seller at a particular point of time.
and willing to offer for sale at a particular price during a certain period of time.
Stock is the outcome of production.
Supply is derived out of stock.
Stock can be increased if production is increased.
Supply can be increased if stock is increased.
Stock is generally more than supply.
Supply can be less than or equal to stock. However, it cannot exceed stock.
Stock is a static concept and is not expressed in relation to price and time.
Supply is a flow concept and is always expressed in relation to price and time.
Average Revenue & Average Cost
(i) Average Revenue (AR) refers to the total revenue per unit of output sold.
Average Cost (AC) refers to the total cost of production per unit.
(ii)
It is obtained by dividing the total revenue by the number of units sold.
It is calculated by dividing total cost by total quantity of production.
(iii) Average Revenue = Total Revenue Total Quantity (sold)
Total Cost
Average Cost = Total Quantity (produced)
(iv)
Normally, the Average Revenue of a commodity will always be more than its Average Cost.
Normally, the Average Cost of a commodity will always be less than its Average Revenue.
C.
• There is a direct relationship between price and quantity supplied.
• The supply curve is a positive slope.
• As the price increases quantity supplied also increases.
• At the lowest price, 10 quantity supplied is less than 200, at the highest price 40 the quantity supplied us the highest 500.
• The supply curve moves upward from left to right.