Supply Analysis

Meaning of Supply
Supply means the quantities of goods which are offered for sale at particular prices during a giver
period of time. Thus, the supply of a commodity may be defined as the amount of that commodity
which the sellers (or producers) are able and willing to offer for sale a particular price during a
certain period of time.
Factors Affecting Supply
The determinants of supply, other than price, are as follows:
1) Price.
2) Prices of related goods.
3) Objectives o producer
4) Infrastructure
5) The cost of factors of production
6) The State of Technology
7) Factors outside the Economic Sphere: Weather conditions, floods and droughts, epidemics
etc.
8) Tax and Subsidy

Statement of the Law

Law of supply expresses a relationship between the supply and price of a product. It states a direct
relationship between the price of a product and its supply, while other factors are kept constant.
“Other things remaining unchanged, the supply of a commodity expands with a rise in its price and
contracts with a fall in its price.”

In case the price of a product increases, sellers would prefer to increase the production of the
product to earn high profits, which would automatically lead to increase in supply. Similarly, if the
price of the product decreases, the supplier would decrease the supply of the product in market as
he/she would wait for rise in the price of the product in future.

The law of supply can be better understood with the help of supply schedule, supply curve, and
supply function. Let us discuss these concepts in detail in the next sections.

Supply Schedule:
Supply schedule shows a tabular representation of law of supply. It presents the different quantities
of a product that a seller is willing to sell at different price levels of that product.

A supply schedule can be of two types, which are as follows:

1. Individual Supply Schedule: It refers to a supply schedule that represents the different
quantities of a product supplied by an individual seller at different prices.
Table-8 shows the supply schedule for the different quantities of milk supplied in the
market at different prices:
2. Market Supply Schedule: It refers to a supply schedule that represents the different quantities
of a product that all the suppliers in the market are willing to supply at different prices. Market
supply schedule can be drawn by aggregating the individual supply schedules of all individual
suppliers in the market.
Table-9 shows the market supply schedule of a product supplied by three suppliers. A, B, and
C:

Supply Curve:
The graphical representation of supply schedule is called supply curve. In a graph, price of a
product is represented on Y-axis and quantity supplied is represented on X-axis. Supply curve can
be of two types, individual supply curve and market supply curve. Individual supply curve is the
graphical representation of individual supply schedule, whereas market supply curve is the
representation of market supply schedule.

Figure-14 shows the individual supply curve for the individual supply schedule (represented
in Table-8):

In Figure-14, the supply curve is showing a straight line and an upward slope. This implies that the
supply of a product increases with increase in the price of a product.

Figure-15 shows the market supply curve of market supply schedule (represented in Table-
9):
The slope of market supply curve can be obtained by calculating the supply of the slopes of
individual supply curves. Market supply curve also represents the direct relationship between the
quantity supplied and price of a product.

Supply Function:
Supply function is the mathematical expression of law of supply. In other words, supply function
quantifies the relationship between quantity supplied and price of a product, while keeping the
other factors at constant. The law of supply expresses the nature of relationship between quantity
supplied and price of a product, while the supply function measures that relationship.

The supply function can be expressed as:

Sx = f (Px)

Where:
Sx = Quantity supplied for product X
Px = Price of product X
f = Constant representing change produced in Sx with one unit change in Px

Assumptions in Law of Supply:

The law of supply expresses the change in supply with relation to change in price. In other words
the main assumption of law of supply is that it studies the effect of price on supply of a product,
while keeping other determinants of supply at constant.

Apart from this, there are certain assumptions that are necessary for the application of law
of supply, which are as follows:
1. Assumes that the price of a product changes, but the change in the cost of production is
constant. This is because if the cost of production rises with increase in price, then sellers
would not supply more due to the reduction in their profit margin. Therefore, law of supply
would be applicable only when the cost of production remains constant.
2. Assumes that there is no change in the technique of production. This is because the
advanced technique would reduce the cost of production and make the seller supply more
at a lower price.
3. Assumes that there is no change in the scale of production. This is because if the scale of
production changes with a period of time, then it would affect the supply. In such a case, the
law of supply would not be applicable.
4. Assumes that the policies of the government remain constant. If there is an increase in tax
rates, then the supply of product would decrease even at the higher price. Therefore, for the
application of law of supply, it is necessary that government policies should remain
constant.
 5. Assumes that the transportation cost remain the same. In case the transportation cost
reduces, then the supply would increase, which is invalid according to the law of supply.
6. Assumes that there is no speculation about prices in future, which otherwise can affect the
supply of a product. If there is no speculation about products, then the economy is assumed
to be at balance and people are satisfied with the available products and do not require any
change.

EXCEPTIONS OR LIMITATIONS OF LAW OF SUPPLY

There are some conditions under the Law of Supply does not hold true. Those conditions are called
exceptions of Law of Supply. The exceptions or limitations are as follows:
1. Auction sale: Law of Supply does not hold true in a case of an auction sale. It happens when
a seller is in the financial crisis. Seller becomes ready to sell his goods at any cost. So, it does
not follow the law of supply.
2. Perishable goods: Those goods which have a very short life time and become useless after
certain period of time are called perishable goods. Such goods are to be supplied within a
limited time. So, the supply of perishable goods does not hold the law of supply.

3. Agriculture goods: The law of supply is not applicable to agriculture goods. The suppliers of
such goods are governed by the seasonal factors than the price. So, the farmers may not
wait for the application of a law of supply.
4. Stock Clearance: Due to advanced technology, new goods and services are produced which
replaces the old one. The seller tries to sell more at low price because of fear of being out of
fashion and so to get rid of old stock. In this situation, this law may not exist.
5. Starting a new business: One who desires to start a new business sells the products at low
cost to make money fast. In this condition, the law of supply does not exist.

6. Prediction of cost: If the cost of any goods and services are falling and are excepted to fall
further, then the seller will be ready to sell more goods even the price falls. Thus, the law of
supply does not exist in such condition.

Elasticity of Supply
Elasticity of supply measures the degree of responsiveness of quantity
supplied to a change in own price of the commodity. It is also defined
as the percentage change in quantity supplied divided by percentage
change in price.

It can be calculated by using the following formula:

ES = % change in quantity supplied/% change in price
Symbolically,

ES = ∆Q/Q ÷ ∆P/P = ∆Q/∆P × P/Q

Since price and quantity supplied, in usual cases, move in the same
direction, the coefficient of ES is positive.
Types of Elasticity of Supply:
For all the commodities, the value of Es cannot be uniform. For some
commodities, the value may be greater than or less than one.
Like elasticity of demand, there are five cases of E S:
(a) Elastic Supply (ES>1):
Supply is said to be elastic when a given percentage change in price
leads to a larger change in quantity supplied. Under this situation, the
numerical value of Es will be greater than one but less than infinity.
SS1 curve of Fig. 4.17 exhibits elastic supply. Here quantity supplied
changes by a larger magnitude than does price.

(b) Inelastic Supply (ES< 1):

Supply is said to be inelastic when a given percentage change in price
causes a smaller change in quantity supplied. Here the numerical
value of elasticity of supply is greater than zero but less than one. Fig.
4.18 depicts inelastic supply curve where quantity supplied changes by
a smaller percentage than does price.
(c) Unit Elasticity of Supply (ES = 1):
If price and quantity supplied change by the same magnitude, then we
have unit elasticity of supply. Any straight line supply Curve passing
through the origin, such as the one shown in Fig. 4.19, has an elasticity
of supply equal to 1. This can be verified in this way.

For any straight line positively-sloped supply curve drawn through the
origin, the ratio of P/Q at any point on the supply curve is equal to the
ratio ∆ P/∆ Q. Note that ∆ P/∆ Q is the slope of the supply curve while
elasticity is (1/∆P/∆Q = ∆Q/∆P).Thus, in the formula (∆Q/∆P. P/Q),
the two ratios cancel out each other.
(d) Perfectly Elastic Supply (ES = ∞):
The numerical value of elasticity of supply, in exceptional cases, may
reach up to infinity. The supply curve PS1 drawn in Fig. 4.20 has an
elasticity of supply equal to infinity. Here the supply curve has been
drawn parallel to the horizontal axis. The economic interpretation of
this supply curve is that an unlimited quantity will be offered for sale
at the price OS. If price slightly drops down below OS, nothing will be
supplied.

(e) Perfectly Inelastic Supply (ES  = 0):

Another extreme is the completely or perfectly inelastic supply or zero
elasticity. SS1 curve drawn in Fig. 4.21 illustrates the case of zero
elasticity. This curve describes that whatever the price of the
commodity, it may even be zero, quantity supplied remains unchanged
at OQ. This sort of supply curve is conceived when we consider the
supply curve of land from the viewpoint of a country, or the world as a
whole.
One important point to note here. Any straight line supply curve that
intersects the vertical axis above the origin has an elasticity of supply
greater than one (Fig. 4.17). Elasticity of supply will be less than one if
the straight line supply curve cuts the horizontal axis on any point to
the right of the origin, i.e. the quantity axis (Fig. 4.18).

Measurement of Elasticity of Supply:

The following two methods that are used for calculating price elasticity of supply.
(i) Percentage or Proportionate method
(ii) Geometric method
Detailed description of each method is given below:
Percentage or proportionate method This is the most popular method of measurement of
price elasticity of supply. With the help of this method we can calculate the accurate value of
price elasticity of supply. This method measures the degree of responsiveness of quantity
supplied of a commodity to change in its price. The price elasticity of supply is the ratio of
percentage change in quantity supplied of a commodity to percentage change in its price. It
can be calculated with the help of the following method:

Determinants of Elasticity of Supply:

Here we are concerned with certain factors which affect elasticity of
supply viz., the nature of the good, the definition of the good, the
relevance of the time period, and so on.
(a) The Nature of the Good:
As with demand elasticity, the most important determinant of
elasticity of supply is the availability of substitutes. In the context of
supply, substitute goods are those to which factors of production can
most easily be transferred. For example, a farmer can easily move
from growing wheat to producing jute. Of course, mobility of factors is
very important for such substitution.

As a general rule, the more easily the factors can be transferred from
the production of one good to that of another, the greater will be the
elasticity of supply. Since durable goods can be stored for a long time,
its elasticity of supply is very high. But for non-durable goods and
perishable goods elasticity of supply tends to be very low.

(b) The Definition of the Commodity:

As in the case of demand, elasticity of supply also depends on the
definition of the commodity. The narrowly a commodity is defined the
greater is its elasticity of supply. For example, it is easier for a tailor to
transfer resources from producing red skirts to green skirts than from
skirts to men’s trousers.

(c) Time:
Time also exerts considerable influence on the elasticity of supply.
Supply is more elastic in the long run than in the short run. The reason
is easy to find out. The longer the time period, the easier it is to shift
resources among products, following a change in their relative prices.

This is usually true in the case of most agricultural commodities,

because of the natural time lag between planting and harvesting of
crops. In agriculture, production plans have to be made months or
even years ahead and they cannot be altered quickly.

Manufacturing industries, on the other hand, can usually adjust their

output upwards or downwards fairly quickly in response to changing
conditions in the market.

Extractive industries come somewhere between the two:

Various types of mining, oil production and forestry can only alter
their production plans slowly and, therefore, at any given time, have
relative inelastic supply conditions.

Fig. 4.23 shows how time influences the supply of a commodity. If a

very short period or momentary period is considered, the supply curve
will be perfectly inelastic (Q1S1curve), where quantity supplied does not
change even if price changes.

In the short run some degree of elasticity is found since supply can be
adjusted to price change (SS2 curve). SS3 curve is a rather long run
supply curve when quantity can be adjusted greatly to price change. As
price increases from OP to OP1 quantity supplied is unresponsive if the
supply curve is Q1S1.
Quantity supplied increases to OQ2 (> OQ1) when the supply curve is
SS2 and quantity supplied rises to OQ3 (> OQ2 > OQ1) if the supply
curve is SS3. Thus the supply of a commodity responds more, or is
more elastic if a long time period is taken into account.
(d) The Cost of Attracting Resources:
If supply is to be increased it is necessary to attract resources from
other industries. This usually involves raising the prices of these
resources. As their prices rise, cost of production also increases. So
supply becomes relatively inelastic.

If these resources can be obtained cheaply then supply is likely to be

relatively elastic. These considerations become very important at times
of full employment when the only available factors of production are
those which can be attracted from other industries and uses.

(e) The Level of Price:

Elasticity of supply is also likely to vary at different prices. Thus, when
the price of a commodity is relatively high, the producers are likely to
be supplying near the limits of their capacity and would, therefore, be
unable to make much response to a still higher price. When the price
is relatively low, however, producers may well have surplus capacity
which a higher price would induce them to use.
Cost of production of additional units of a good If the cost of production of additional units of a
commodity increases sharply, the profit may not rise even if the price increases. In such cases, the
producer is not interested in increasing the production in substantial quantity. The supply of such goods
is relatively inelastic. On the other hand if the marginal cost of additional unit decreases per unit, the
producer will be motivated to increase the output with a little increase in price. In such a case the supply
of the commodity is more elastic.