Law of Supply

1- Law of Supply

The quantity of a commodity that is supplied is influenced by various determinants of supply like, the price of commodity, prices of related goods, input prices, existing technology, goal of firms etc. Keeping all these variables except price constant, a rise in the price of a commodity causes a rise in its supply and a fall in the price brings a decline in its supply. In other words, higher the price, higher will be the quantity supplied and lower the price lower will be the quantity supplied. This shows that there is a positive relationship between the price and quantity of a commodity that is supplied. This relationship between the price and quantity is law of supply. Hence, law of supply is the one which states the positive relationship between the price of a commodity and its quantity supplied.

Law of supply is based on the following assumptions.
1- No change in prices of related goods,
2- No change in input prices,
3- No change existing technology,
4- No change in producers expectations,
5- No change in goals of firms,
6- No change in weather etc.

Based on the above assumptions, law of supply can be stated by the help of the following supply schedule and diagram.

Supply Schedule-1

Combinations

A

D 

Price of good-X

1

Qnt. supplied of good-X


The above schedule shows that at $1 per unit price, the quantity supplied is equal to 2 units. when per unit price increases to $2, $3 and $4, quantity of good-X supplied  also increases to 4, 6 ad 8 units. Thus, there is a positive relationship between the price and quantity of good-X supplied.

The above supply schedule can also be plotted in a diagrammatic form to explain the positive relationship between the price and quantity of good-X supplied.


In the above diagram, the various quantity of good-X that is supplied and its prices have been measured along X and Y axis respectively. The upward sloping SS curve is the supply curve which represents different price-product combinations of good-X. The quantity of good-X that is supplied is equal to 2 units at per unit price equal to $1. When the price increases to $2, $3 and $4, the supply of good-X also extends to 4, 6 and 8 units represented by the price-product combinations i.e. B, C and D respectively. By joining all these combinations together with a line, we get a positively slopping curve. This curve is the supply curve which shows that quantity supplied of good-X expands with a rise a rise in per unit price and vice-versa. This is how law of supply states that there is a positive relationship between the quantity of a commodity supplied and its price, remaining other things constant.

2- Individual Supply

Individual supply refers to the quantity of a commodity that an individual firm or producer willing and able to offer for sale in a market at various prices over a period of time, remaining all other determinants the same. As the quantity of a commodity supplied at various prices by an individual firm is presented in a scheduler form, we get an individual supply schedule. After plotting the supply schedule in a diagrammatical form, we can derive an individual supply curve. 
An individual supply schedule and its diagrammatical presentation is given here.

Individual Supply Schedule

Combinations

A

D 

Price of commodity-X

2

Qnt. supplied of  commodity-X

12 


The above individual supply schedule shows that an individual firm or producer is willing and able to offer for sale the quantity of commodity-X equal to 3, 6, 9 and 12 units at per unit price equal to $2, $4, $6 and $9 during a period of time, say a week. By plotting the schedule in a diagrammatical form we derive, we derive an individual supply curve as shown in the diagram below.

Individual Supply Curve

In the above diagram, the various quantity of commodity-X that is supplied and its prices have been measured along X and Y axis respectively. The upward sloping SS curve is the individual supply curve which represents different price-commodity combinations of commodity-X. The quantity of commodity-X that is supplied is equal to 3 units at per unit price equal to $2. When the price increases to $4, $6 and $8, the supply of commodity-X also extends to 6, 9 and 12 units represented by the price-commodity combinations i.e. B, C and D respectively. By joining all these combinations together with a line, we get an individual supply curve. This is how an individual supply curve can be derived by plotting an individual supply schedule.

3- Market Supply

Market supply is the quantity of a commodity that each individual firm or seller together offer for sale in a market at various prices in a specific period of time. A scheduler presentation of the various prices and quantity of the commodity that all the producers or sellers willing to sell together is the market supply schedule. An example of market supply schedule is presented here.

Market Supply Schedule

Combinations

 A

Price of commodity-X

 $2

$4 

$6 

Supplied by Firm-A

 0

 1

 2

Supplied by Firm-B

 1

 2

 3

Supplied by Firm-C

 2

 3

 4

Market Supply (Sum of individual supply)

 3

 6

 9


The above market schedule consists of the quantity of commodity-X that the three individual firms are willing and able to sell in a market at prices $2, $4 and $6 per unit. Firms, A , B and C are ready to sell 0, 1 and 2 unit of commodity-X at the price $2 per unit and the market supply at this price is the sum of the individual supply of each firm which is equal to 0+1+2=3 units. At $4 per unit price, the firms are ready to sell 1, 2 and 3 units and at $6 they are ready to sell 2, 3 and 4 units where the market supply is equal to 1+2+3=6 units and 2+3+4=9 units.

When a market supply schedule is plotted in a diagram, we can derive a market supply curve. The market supply curve that is derived by plotting the above market supply schedule in a diagram is shown below.

Market Supply Curve

In the diagram, the price and quantity supplied are measured along X and Y axis respectively. S1S1, S2S2 and S3S3 are the individual firms supply curves and MSMS is the market supply curve. It is the horizontal summation of individual firms supply curves. At per unit price $2, market supply of commodity-X is equal to 3 units which is denoted by the point A. At per unit prices $4 and $6, market supply of the commodity is equal to 6 and 9 units denoted by the points B and C as shown in the diagram. By joining these point together with a blue line, we get an the upward sloping market supply curve MSMS. Thus, it is clear that market supply curve represents the quantity of a commodity made available for sale in a market by many of the firms or producers at various prices in a period of time.

4- Movement Along and Shift in Supply Curve

4.1- Movement Along Supply Curve


When there a change in price, remaining all other determinants of supply constant, the quantity of a commodity supplied also changes. With a rise in the price of commodity, the supply of the commodity goes up where the price-commodity combination moves upward along the same supply curve. On the other hand, with a fall in the price, its supply goes down where the price-commodity combination moves downward along the same supply curve. Such a movement of price-commodity combinations along the same supply curve due to change in the price is called movement along supply curve. The upward movement brings an expansion in supply whereas the downward movement brings a contraction in supply of the commodity. The movement along supply curve can also be illustrated by the help of following supply schedule and diagram.

Supply Schedule-2

Combinations

A

Price of Commodity-X

2

Supply of Commodity-X

12 


In the schedule, let us suppose that B is the initial price-commodity combination where per unit price is equal to $4 and quantity supplied is 8 units. With a rise in price from $4 to $6, quantity supplied of commodity expands to 12 units and its price-commodity combination C moves upward along the supply curve. Similarly with a fall in the price from $4 to $2, supply of commodity contracts to 4 units and its price-commodity combination A moves downwards along the supply curve. The movement of the price-commodity combinations are shown in the following diagram.

Movement Along Supply Curve

The diagram shows that the rise in the price from $4 t0 $6 causes the price-commodity combination C, move upward from the point B to C  and the fall in the price from $4 to $2 causes the price-commodity combination A move downward from B to A. Such a movement of the point of combination between the price and the quantity supplied along the same supply curve, due to change in the price, is the movement along the supply curve.

4.2- Shift in Supply Curve

Due to change in other determinants of supply except the price also bring a change in supply of a commodity. When there is an increase in supply as a result of change in other things, the supply curve shifts forward and on the other hand it shifts backward when there is a fall in supply. Such a shift in supply to right or to the left due to change in other things is called shift in supply curve. The forward shift in supply curve brings an increase in quantity supplied whereas the backward shift causes a decrease in quantity supplied. The shift in supply curve can also be explained by the help of a schedule and diagram as follows.

Supply Schedule-3

Combinations

A

Price of Commodity-X

10

10 

10 

Supply of Commodity-X

12 


In the above supply schedule, the price of commodity is equal t0 $10, but there is a change in quantity supplied in a commodity. It has happened like that because the price is constant but there is change in other determinants of supply. For instance, if the price of raw material falls, the production cost also falls. As a result, at the same price, the producer can supply more quantity of the same commodity and it reverses if there is a rise in the price of raw material. There are so many other such determinants which cause a change in quantity supplied without any change in the price. The diagrammatical explanation of shift in supply curve is given below as;


Shift in Supply Curve


In the diagram, let's suppose that B is the initial price-commodity combination represented by S2S2 supply curve. Remaining the price same, due to change in other things, the supply increases. Consequently, the price-commodity combination shifts to C which results to shift in supply curve from S2S2 to S3S3. Similarly if there is a fall in supply as a result of change in other things, the price-commodity combination shifts to A from B which causes the supply curve shift from S2S2 to S1S1. This is how with a change in other things except the price the supply curve shifts forward or backward from its initial position.


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