Concept and Meaning of supply
1- Meaning of Supply
In common sense, supply refers to the quantity of a commodity that a producer or a firm wants to offer for sale in a market. However, in economics, supply implies to the quantity of commodity that a producer or a firm is able and willing to offer for sale (sell) at various prices, in a market over a specific period of time. In fact, supply of a commodity is a function of price and other determinants of supply where price plays important role depending on the cost of production and facilities rendered on quantity of the commodity supplied. Therefore, supply may refers to a scheduler presentation of the produce that the producer is willing and able to sell at given price in a certain period of time.2- Function of Supply
The quantity of a commodity supplied is affected by various determinants of supply like the price of own commodity, availability of raw materials, cost of production, technology, price of related commodity, infrastructure development, tax and subsidies, goal of firm etc. It implies that there is a functional relationship between quantity supplied of a commodity (Qs) and its determinants. This functional relationship is known as function of supply. The function of supply is expressed as;
Qsx = f(Px, Ar, Cp, Tp, Pr, Id, TS, Gf.....)
Where;
Qsx = Quantity supplied of good-X
f = Function
Px= Price of good-X
Ar= Availability of raw materials
Cp= Cost of production
Tp= Production technology
Pr= Price of related commodity
Id= Infrastructure development
TS =Tax and subsidies
Gf = Goal of firm
If all other determinants except price are assumed to be constant, the supply function is expressed as;
Qs = f(p)
2.1 Types of Supply Function
Supply functions is divided into a linear and non-linear supply functions.
2.1.1- Linear Supply Function
When the price of a commodity and its quantity supplied change in the equal ratio, it is called linear supply function. In other words, if the slop of supply curve is constant throughout its length, it constitute a linear supply function. The linear supply function can be expressed symbolically as;
Qsx = a + bPx ......... (i)
Where;
Qsx = Quantity supplied of a commodity,
a = Autonomous supply,
b = Slope of supply curve,
Px = Price of commodity-X
For example,
Given the linear supply function as, Qsx = 2 + 2Px, Find quantity supplied of commodity-X at the prices, 0, 1, 3 and 4 and also plot in a diagram.
Solution;
Given the supply function, quantity supplied at prices 0, 1, 2 and 3 is as calculated below,
Qsx at price 0, Qxs = 2 + 2Px
= 2 + 2 ⅹ 0
= 2,
Qsx at price 1, Qxs = 2 + 2Px
= 2 + 2 ⅹ 1
= 4,
Qsx at price 2, Qxs = 2 + 2Px
= 2 + 2 ⅹ 2
= 6,
Qsx at price 3, Qxs = 2 + 2Px
= 2 + 2 ⅹ 3
= 8,
Presenting the quantity supplied at different prices in the schedule as;
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Calculating the slope at each point of movement along the supply curve;
Slope from A to B, P1 = 0, P2 = 1, Q1 = 2, Q2 = 4
ΔP = P2 - P1
= 1 - 0
= 1
ΔQ = Q2 - Q1
= 4 - 2
= 2
Slope (b) = ΔQ/ΔP
= 2/1
= 2
Slope from B to C, P1 = 1, P2 = 2, Q1 = 4, Q2 = 6
ΔP = P2 - P1
= 2 - 1
= 1
ΔQ = Q2 - Q1
= 6 - 4
= 2
Slope (b) = ΔQ/ΔP
= 2/1
= 2
Slope from C to D, P1 = 2, P2 = 3, Q1 = 6, Q2 = 8
ΔP = P2 - P1
= 3 - 2
= 1
ΔQ = Q2 - Q1
= 8 - 6
= 2
Slope (b) = ΔQ/ΔP
= 2/1
= 2
The above calculation verifies that the slope of the supply curve is constant throughout its length and in such a situation, it is linear supply function. It can also be plotted in a diagrammatical form as;
In the diagram, it has been shown that SS is the linear supply curve or function. It is because at each movement of the points of combinations between the price and quantity supplied, the slope is equal to 2.
2.1.2- Non-linear supply function
As the price of a commodity and quantity supplied get changed in an unequal ratio, then it is called non-linear supply function. In other words, if the slope of a supply curve changes all along the curve, it forms a non-linear supply curve or function.
The non-linear supply function is expressed in a power function as;
Where Qsx = Quantity supplied of good-X,
a = Autonomous supply,
Px = Price of good-X,
b = Slope
Let's clarify none-linear supply function with the help of the following supply schedule.
1 | 2 | 4 | 7 | |
0 | 2 | 3 | 4 |
Calculating the slope at each point of movement along the supply curve;
Slope from A to B, P1 = 1, P2 = 2, Q1 = 0, Q2 = 2
ΔP = P2 - P1
= 2 - 1
= 1
ΔQ = Q2 - Q1
= 2 - 0
= 2
Slope (b) = ΔQ/ΔP
= 2/1
= 2
Slope from B to C, P1 = 2, P2 = 4, Q1 = 2, Q2 = 3
ΔP = P2 - P1
= 4 - 2
= 2
ΔQ = Q2 - Q1
= 3 - 2
= 1
Slope (b) = ΔQ/ΔP
= 1/2
= 0.5
Slope from C to D, P1 = 4, P2 = 7, Q1 = 3, Q2 = 4
ΔP = P2 - P1
= 7 - 4
= 3
ΔQ = Q2 - Q1
= 4 - 3
= 1
Slope (b) = ΔQ/ΔP
= 1/3
= 0.33
The above calculation shows that the slope of the supply curve changes throughout its length and in such a situation, it is non-linear supply function. It can also be plotted in a diagrammatical form as;
3- Determinants of supply
The quantity of a commodity that is supplied is determined by various factors like the price of the commodity, price of resources, a change in production technology, size of price of related commodity etc. Some of the determinants of supply have been mentioned below.
3.1- Price of the commodity
The price of the commodity that is supplied, is one of the determinants of supply. If the price of the commodity goes up, the firms start to produce more in order to earn more profit. On the contrary, with a fall in the price of the commodity, they are discouraged to increase in their production and supply falls.
3.2- Price of related goods
When the price a related good changes, the supply of goods gets affected. For instance, pen an ink are related goods, Other things remaining the same, with a fall in the price of pens, the demand for pens likely to increase whereas the ink-producers start to produce more ink and offer for sale to meet the potential demand for ink. Thus the supply of ink may increase due to fall in the price of related good pens.
3.3- Price of inputs
The price of inputs is also a determinant that affects quantity of goods that is supplied. With an increase in the price of inputs, the production cost goes up and it is less profitable for a firm to produce and supply more goods. Hence, with an increase in the price of inputs, firms cut in production and the supply of goods falls. Conversely, it is more profitable to produce and supply goods when the price of inputs goes down. Consequently, firms start to produce and supply more goods with a fall in the price of inputs. Thus, a change in the price of inputs determines the quantity supplied of goods.
3.4- Production technology
Production technology also determines the quantity of goods that is supplied. An innovation of an advanced technology and its application enables firms to produce more qualitative goods at a lower cost in a large quantity. Consequently, firms can produce and supply more goods with a use of an advanced production technology. So technology is also determines quantity of supply.
3.5- Expectation
A producer's expectation to change in the price of goods in future also determines the quantity of goods that is supplied. If the producer expects to rise in the price goods in future, he supplies less quantity of goods in present time period and stores more. He expects to gain more profit by supplying more at a higher price in future. Reverse will take place when the producer expects to fall in the price of goods in future. Thus, the producer's expectation determines the quantity of goods that is supplied.
3.6- Change in numbers of producers
A change in the number of producers also determines the supply of goods. As the number of producers increase, naturally production of goods goes up and consequently there is an increase in its supply. Conversely, with a fall in number of producers, the production of goods adversely influences and the supply of goods also falls. Thus, change in the number of producers determines supply of goods.
3.7- Weather
Supply of most of goods depends weather as well. For instance, a favorable weather for sugarcane production enhances the production and supply of sugar. On the other hand, an unfavorable weather influences production and supply of goods negatively. A bad weather for sugarcane causes a fall in supply of sugar. Thus, a weather is also a determinant of supply.
There are so many other factors which determine supply of goods. The goal of firm, a political environment in the country, availability of resources, stock of capital, general rate of interest, availability of technological manpower, development in infrastructure etc. are also the factors which determine the supply of goods.
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