Foundational Economic Concepts: Supply
Buyers can purchase goods in the market only when producers (farmers, manufacturers, sellers) offer them for sale. The production unit in which production takes place is called a firm.
Meaning & 3 Essential Elements of Supply
Core Formal Definition
Supply of a commodity is defined as the quantity of the commodity that a seller offers for sale at a given price at a given time.
3 Essential Elements in Definition:
1. Quantity offered for sale by the seller.
2. Price given in the market at which seller is willing to sell.
3. Time Period (day, week, month) during which quantity is offered.
Textbook Examples of Supply
- • Ganga Singh: Sold 120 litres of milk at ₹25/litre during last week.
- • Fruit Seller: Sold 600 kg apples during past 15 days at ₹50/kg.
- • 'X' Ltd: Sold 8 quintals of sugar at ₹2800/quintal in one day.
- • Grain Merchant: Sold 300 quintals of rice at ₹2300/quintal in August.
Distinction Between Stock and Supply
"Availability in market" is not equal to "Supply". Supply is strictly that portion of stock offered for sale at a price over a given time period.
Stock
The total quantity of a commodity available with a seller/firm at a particular point of time. Measured as a static inventory.
Supply
That part of stock that the seller is ready to sell at a given price during a given time period. Measured continuously over time.
6 Major Determinants of Individual Supply
1. Price of Commodity
Higher price increases average & total revenue. Since cost is fixed initially, higher price means higher profit margin $\rightarrow$ higher supply.
2. Technology of Production
Improved technology reduces per-unit cost of production, increasing profit margins and inducing firms to supply more. Old tech raises unit cost and reduces supply.
3. Price of Inputs
If input price (e.g., milk for ice cream) falls, unit production cost falls $\rightarrow$ higher profit margin $\rightarrow$ supply increases. Input price rise reduces supply.
4. Price of Related Goods
If price of rice rises relative to wheat, a farmer diverts land/resources from wheat to rice $\rightarrow$ supply of rice increases, supply of wheat decreases.
5. Objective of the Firm
Profit maximization firms supply more only at higher prices. Sales/goodwill maximization firms supply higher volume even at lower prices.
6. Government Policy
Increase in VAT/sales/excise tax increases per-unit cost $\rightarrow$ decreases supply. Tax concessions/subsidies reduce unit cost $\rightarrow$ increase supply.
Law of Supply & Upward Sloping Supply Curve
"All other factors determining supply remaining constant (ceteris paribus), the price of a commodity and its quantity supplied are directly related."
Textbook Numerical Schedule (Table 10.2: Supply of Mangoes by Mohan)
| Point | Price of Mangoes (₹ per kg) | Quantity Supplied per day (in kgs) |
|---|---|---|
| A | ₹ 20 | 100 kg |
| B | ₹ 30 | 200 kg |
| C | ₹ 40 | 300 kg |
| D | ₹ 50 | 400 kg |
| E | ₹ 60 | 500 kg |
3 Reasons Why Supply Curve Slopes Upwards (Positive Slope):
Market Supply & Specific Market Determinants
Market Supply is the total quantity of a commodity supplied by all the firms in the market at a given price at a given time ($S_M = S_X + S_Y + S_Z$).
| Price (₹/quintal) | Firm X (quintals) | Firm Y (quintals) | Firm Z (quintals) | Market Supply ($X + Y + Z$) |
|---|---|---|---|---|
| ₹ 2800 | 8 | 10 | 15 | 33 quintals |
| ₹ 2900 | 9 | 11 | 16 | 36 quintals |
| ₹ 3000 | 10 | 12 | 17 | 39 quintals |
| ₹ 3100 | 12 | 14 | 20 | 46 quintals |
| ₹ 3200 | 15 | 17 | 25 | 57 quintals |