CHAPTER 7

SUPPLY

SYNOPSIS
 Meaning of supply
 The law of supply
 Difference between Stock and Supply
 Factors affecting Supply.
 Exceptions to the Law of Supply

I MEANING OF SUPPLY

1. Definition

“Supply refers to the quantity or volume of goods or services

offered for sale at a particular price at a given point of time. “

2. Meaning.

 This also means that supply is always at a price.

 If the price changes supply also changes.
 Supply is relative from person to person, place to place and from
time to time.
 Just as demand implies willingness and ability to pay, in the
same manner the phrase ‘ready to offer for sale’ in the definition of
supply given above implies both willingness and ability to deliver the
goods.
 The supply of any good may thus be defined as:

“ A schedule of respective quantities of the goods which people

are ready to offer for sale at all possible prices”
II. THE LAW OF SUPPLY.

The Law of Supply states that:

“ Other things being equal more will be supplied at higher

prices and vice versa- less will be supplied at lower prices”
 Thus the Law of supply shows the direct positive one to one
relationship between price and quantity of supply.
 As the price rises supply extends and when the price falls, supply
contracts.
 We can use the following supply schedule to draw the supply
curve.

“ A supply schedule is a list of the alternative quantities of a

commodity offered at alternative prices.”

SUPPLY SCHEDULE

PRICE QUANTITY DEMANDED

(in Rs) ( wheat)

1 100
2 200
3 300
4 400
5 500
 PRICE (in Rs)

QUANTITY DEMANDED ( wheat)

Explanation of the Supply Curve:

“ A supply curve is a list of all the alternative quantities of a

commodity offered at alternative prices”

 On axis OX, the quantity mentioned is in units.

 On axis OY the price of the quantity mentioned for sale is given
in Rs.
 O is the base of both.
i. At the quantity of 100 units of wheat, the price is Rs 1.
ii. At the quantity of 200 units of wheat, the price is Rs 2.
iii. At the quantity of 300 units of wheat, the price is Rs 3.
iv. At the quantity of 400 units of wheat, the price is Rs 4.
v. At the quantity of 500 units of wheat, the price is Rs 5.
 Hence we notice that as the prices rises, quantities of
wheat to ve sold are more while when it falls, the quantities of
wheat to be sold are less.
 The supply curve has a positive slope indicating a
direct one on one relationship between the price of the commodity
and the quantity of the commodity supplied. i.e. If the price
increases, supply increases and if the price decreases then the
supply also decreases.
 The supply curve SS slopes in an upward direction as
it moves from left to right.
 This means that as the prices rise, more is being
offered for sale and vice versa.
IV. DIFFERENCE BETWEEN STOCK AND SUPPLY.

Stock Supply
1. It means the total quantity It means the total quantity which
which can be offered for sale at a can be offered for sale if the
certain price. conditions are favorable.

2. It is a “go- down” or a Goods which are sold on the

“warehouse” concept. shelves of the shops is called
supply
3. It is a fund concept where one It refers to a continuous flow of the
stores funded goods. products in the market.

4. It has no price tag attached. Supply always comes with a price.

5. Stock is “potential” supply. It refers to actual or effective
supply.
 V. FACTORS AFFECTING SUPPLY.

 The following are the assumptions to the Law of Supply.

1. Number and Size of the Firms.
2. Costs of Production.
3. Natural Calamities.
4. Technology.
5. Political Climate.
6. Taxation.
7. Transport Costs.

1. Natural Conditions.
 If rain is plentiful, timely and well distributed
there will be bumper crops. On the contrary floods , droughts, or
earthquakes and other natural calamities are bound to affect
production adversely. This is one set of conditions which brings
about a change in the supply.
2. Technical Progress.
 The volume of production or supply is also influenced by progress in
the technique of production. IN manufacturing industries this is a
very important factor. A new machine may have been invented, a
new process discovered or a new material found or perhaps a new
use may have been found for a by-product. The discoveries of
synthetic dyes, artificial rubber and wool are some such discoveries
or improvements in the technique.
 3. Change in Factor Prices
 A change in the process of the factors of production also brings
about a change in the supply of the commodity. If the factors of
production become cheap, the supply will increase and vice-versa.
4. Transport Improvements
 Improvement in the means of transport reduces the cost and
increases the supply of the product. Thus conditions of supply
change.
5. Calamities.
 Calamities like war or famine must also affect he supply of
goods. .We are only too familiar with eh shortage of commodities
caused by the was and the dislocation of production by famine.
Even at higher prices adequate supplies are not forthcoming.
6. Monopolies.
 The monopolists may deliberately increase or decrease the supply
as it suits them. Thus exercise of monopolistic power brings about a
change in supply.
7. Fiscal Policy.
 The fiscal policy of the Government also may affect the supply. For
instance, a higher import duty will restrict the supply and a lower
duty will stimulate it.

VI. EXCEPTIONS TO THE LAW OF SUPPLY.

 The following points are exceptions to the law of supply.

1. Food grain production
 Food grain production and supply is strange in the
sense that one the crop is harvested the farmer will first
keep aside what he requires for his own domestic
consumption and for the next farming season. The
remaining becomes marketing or commercial surplus
available for sale in the market at a particular price. If
the price of the food grain increases the supply of the
food grains will not increase because the farmer is not
going to cut his own requirement or go to the market
and buy for himself at higher prices.
 Supply from produced 100 tons of grains, he kept aside
30 tons for domestic consumption and 70 tons became
effective supply. However higher the price increase hr
will not increase the market supply from 70 tons to 80
or 90 tons.
2. Land
 Supply of land in the country is fixed and given just as
each country has its land supply geographically and
politically determined or defined. However higher the
 price of land may increase, the supply of land cannot be
increased because it is fixed and given.
3. Labor Supply