What is supply?

‘Supply refers to the quantity

of a commodity which
producers or sellers are willing
to produce and offer for sale at
a particular price’, in a given
market, at a purticular period
of time
 The three important aspects of
supply are….
• Supply is a desired quantity
• Supply is always explained with
reference to price
• Supply is a flow variable
 Stock and flow concepts
Stock variable Flow variable
• It is an economic • It is an economic
variable which can be variable which can be
measured at a point of measured at a period
time. of time.
• Eg: population, water • Eg: National income,
in a reservoir, goods in water in a river, sales
a warehouse. etc.
 Individual supply

• Individual supply refers to the quantity of a

commodity which a firm is willing to produce
and offer for sale at a particular price during a
specified period.
 Supply Curve

The supply curve has a positive slope, consistent

with the law of supply.
 Market supply
• Market supply refers to the quantity
that all the producers are willing to
produce and offer for sale at a
particular price during a specified
period.
• It is the sum total of individual
supply
Difference between stock and supply
Stock Supply
• Stock is the total • Supply is that part of
quantity of a stock which the
commodity available producers are willing
with the producers to bring to the market
which is ready for and offer for sale at a
sale. particular price.
• Stock is not a part of • Supply depends on
supply stock.
 Determinants of supply

• Price of the commodity:

When price increases,
supply also increases
because it motivate the firm
to supply more in order to
get more profit. When price
decreases, smaller quantity
will be supplied as profit
decreases.
 Determinants of supply

• Goals of the firm: The goals of

the firm may be “profit
maximization"," sales
maximization" or “risk
minimization". If the aim is
sales maximization, they will
produce and supply more and
if the aim is risk minimization,
they will supply less.
 Determinants of supply
• Input prices:
If the prices of inputs and factors
used in production such as raw
materials, labour, machine etc. are
high, the cost of production will be
high. Higher cost of production, at
the given price, reduces the profit
margin and will persuade the
producer to produce and supply
less.
 Determinants of supply
• Prices of related commodities:
Producers always have the tendency of shifting from
the production of one commodity to another
commodity. If the prices of another commodity
increases, especially substitute goods, producers will
find it more profitable to produce that commodity by
reducing the production of the existing commodity.
 Determinants of supply
• Techniques of production:
An improvement in the technique
of production reduces the cost
of production and increases
profit margin. Increased
profitability motivates the
producers to increase the
supply.
 Determinants of supply
• Nature of the market:
A monopolist firm will like to restrict supply so as to
raise the market price and as a result supply decreases.
But in a competitive market there will be no tendency
to restrict output because each firm wants to sell more
to earn more profit.
 Determinants of supply
• The policy of taxation and subsidies:
The taxation policy of the government also
influences the supply of a commodity. For eg> If
government increases the sales tax and excise
duty, it increases the cost of production, which
induces the producer to reduce the supply as the
profit margin decreases.
 Determinants of supply
• Expectations about future prices:
If a producer expects an increase in market price in
future, then they will supply less today and hoard
the stock to sell at a high price in future and vice
versa.
 Determinants of supply
• Natural factors:
In case of agricultural products, the
natural factors like flood, draught
etc. adversely affect the supply of
commodities. On the other hand
favourable climatic conditions
may help in increasing the supply
of agricultural commodities.
 Determinants of supply
• Agreement among producers:
Some times producers may form associations and enter
into some agreement to restrict the supply of a
commodity to earn large profits. They will create
artificial scarcity of the commodities and as a
consequence, the supply will decrease.
 Determinants of demand
• Availability of transport
and communication
facilities:
An improvement in
transport and
communication facilities
will expand the size of
market and this will
motivate the producers to
produce and supply more.