4 supply function

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SUPPLY FUNCTION
 In economics, supply during a given period of time means the
quantities of goods which are offered for sale at particular
prices.
 Hence, the supply of a commodity is defined as the amount
of that commodity which a seller (or producer) are able and
willing to offer for sale at a particular price during a certain
period of time.
 Supply is a relative term.
 It always referred to in relation to time and price.
 A statement of supply without reference to price and time
conveys nothing in economics.
 For instance, a statement such as ‘the supply of milk is 500
liter’ is a meaningless in economics.
 In economics, one must say, the supply at such and such
price and during a specific period.
 Hence the above statement becomes meaningful if it is said
“at a price of 20 per liter, a dairy farm’s daily supply of milk is
500 liters’.

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 Secondly, supply is what the seller is able and
willing to offer for sale.
 The ability of a seller to supply a commodity,
however, depends on the stock available with him.
Thus stock is the major determinant of supply of a
commodity.
Determinants of Supply:
The supply of the commodity depends not
only on the price of the commodity but also on
several other factors collectively called the
conditions of supply.
These conditions are as follows:

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1. Price of the Commodity: Since higher money
income is necessary to induce producers to
produce more, the amount supplied therefore
increases when producers get higher price for the
product.
2. Price of Other Goods: Change in the price of
other goods in the market also has influence on
the supply of the commodity. For Example: if the
price of good Y rises, the producer of good X will
start considering switching his production to good
Y as it has become relatively more attractive to
produce Y now then before.

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3.Prices of Factors of Production: the cost of
production of a commodity depends upon the prices
of different factors of production. When prices of one
of the factors are increases, the production cost
would be higher and the price of the particular
product will be higher as well and vice-versa. This
will lead to changes in the profitability of the different
commodities and their amount supplied.
4. Producer’s Objective: the producers may have
many objectives like profit maximization, sales
revenue maximization, goodwill etc. Amount
supplied of a commodity is often influenced by the
producer’s objective. A goodwill maximiser will sell
more commodities than the profit maximiser.

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5. Factors Outside Economic Sphere: weather
conditions, floods and droughts, epidemics etc do
cause fluctuations in the supply of goods,
particularly of agricultural goods. Fire, war and
earthquakes may destroy productive assets of a
commodity and curtail future supply.
6. Tax and Subsidy: A higher tax on commodity or
factors of production rise its cost of production and
consequently production and supply become less. A
subsidy on the other hand, provides incentive to
production and augments supplies.

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Supply Function:
 Mathematically,Mathematically, the supply function explains the relationshipthe supply function explains the relationship
between the quantity supplied for a commodity and itsbetween the quantity supplied for a commodity and its
determinants.determinants.
 In supply function, the determinants of supply can be summarizedIn supply function, the determinants of supply can be summarized
as under:as under:
SSXX = f (P= f (PXX, P, PFF,, PP11……P……Pnn, O, T, t, s, u), O, T, t, s, u)
Where: SWhere: Sxx refers to the quantity supplied of product x.refers to the quantity supplied of product x.
PPxx refers to the price of product xrefers to the price of product x
PPFF refers to the set of prices of the factor inputs employed forrefers to the set of prices of the factor inputs employed for
producing Xproducing X
PP11…..P…..Pnn refers to the price of all other related products in anrefers to the price of all other related products in an
economy.economy.
O refers to factors outside the economic sphereO refers to factors outside the economic sphere
T refers to the technology usedT refers to the technology used
t refers to taxt refers to tax
s refers to the subsidiess refers to the subsidies
u refers to all other determinants which are not covered in theu refers to all other determinants which are not covered in the
above mentioned determinants.above mentioned determinants.

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Law of Supply:
 The law of supply reflects the general tendency of the
sellers in offering their stock of a commodity for sale in
relation to the varying prices.
 It describes seller’s supply behaviour under given
conditions.
 It has been observed that usually sellers are willing to
supply more with arise in price.
Statement of the Law:
 CETERIS PARIBUS, the supply of a commodity expand
(i.e. rises) with rise in prices and contracts (i.e. Falls)
with fall in its prices.
 The law thus suggests that the supply varies directly
with change in its price. So, a larger amount is supplied
at higher price than at lower price at market.

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Explanation of the Law:
Supply Schedule
Price of ball pen (Rs.) Quantity Supplied (in
000 per Unit)
11
12
13
14
10
13
20
25

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Diagrammatic Representation:
Y
X
S
S
Prices (Rs.)
Quantity Supplied

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Demand Supply Equilibrium (Market
Equilibrium):
 When supply and demand are equal (i.e. when the
supply function and demand function intersect) the
economy is said to be at equilibrium.
 At this point, the allocation of goods is at its most
efficient because the amount of goods being
supplied is exactly the same as the amount of
goods being demanded.
 Thus, everyone (individuals, firms, or countries) is
satisfied with the current economic condition. At the
given price, suppliers are selling all the goods that
they have produced and consumers are getting all
the goods that they are demanding.

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As you can see on the chart, equilibrium occurs
at the intersection of the demand and supply
curve, which indicates no allocative inefficiency.
At this point, the price of the goods will be P* and
the quantity will be Q*. These figures are referred
to as equilibrium price and quantity.
 In the real market place equilibrium can only
ever be reached in theory, so the prices of goods
and services are constantly changing in relation
to fluctuations in demand and supply.
Disequilibrium occurs whenever the price or
quantity is not equal to P* or Q*.

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1. Excess Supply
If the price is set too high, excess supply will
be created within the economy and there will
be allocative inefficiency.

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At price P1 the quantity of goods that the
producers wish to supply is indicated by Q2.
At P1, however, the quantity that the
consumers want to consume is at Q1, a
quantity much less than Q2.
Because Q2 is greater than Q1, too much is
being produced and too little is being
consumed. The suppliers are trying to
produce more goods, which they hope to
sell to increase profits, but those consuming
the goods will find the product less attractive
and purchase less because the price is too
high.

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2. Excess Demand
Excess demand is created when price is set below
the equilibrium price. Because the price is so low,
too many consumers want the good while producers
are not making enough of it.

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In this situation, at price P1, the quantity of
goods demanded by consumers at this price
is Q2. Conversely, the quantity of goods that
producers are willing to produce at this price
is Q1.
Thus, there are too few goods being
produced to satisfy the wants (demand) of
the consumers. However, as consumers
have to compete with one other to buy the
good at this price, the demand will push the
price up, making suppliers want to supply
more and bringing the price closer to its
equilibrium.

4 supply function

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4 supply function