ICAI Notes- Unit 3: Supply | Business Economics for CA Foundation PDF Download

 Page 1


  
  
 
 
BUSINESS ECONOMICS  
 
 
2.74 
 
 
LEARNING OUTCOMES 
UNIT -3: SUPPLY 
 
 
After studying this unit, you would be able to:  
? Explain the meaning of supply. 
? List and provide specific examples of determinants of supply and 
elasticity of supply. 
? Describe the law of supply. 
? Describe the difference between movements on the supply curve and 
shift of the supply curve. 
? Explain the concept of elasticity of supply with examples. 
? Illustrate how the concepts of demand and supply can be used to 
determine price. 
 
3.0 INTRODUCTION 
In a market economy, sellers of products and services constitute the supply side. The sellers 
may include individuals, firms and governments. As the term ‘demand’ refers to the quantity 
of a good or service that the consumers are willing and able to purchase at various prices 
during a given period of time, the term ‘supply’ refers to the amount of a good or service 
that the producers are willing and able to offer to the market at various prices during a 
given period of time.  
Three important points apply to supply: 
(i) Supply refers to what a firm offer for sale in the market, not necessarily to what they 
succeed in selling. What is offered may not get sold. 
© The Institute of Chartered Accountants of India
Page 2


  
  
 
 
BUSINESS ECONOMICS  
 
 
2.74 
 
 
LEARNING OUTCOMES 
UNIT -3: SUPPLY 
 
 
After studying this unit, you would be able to:  
? Explain the meaning of supply. 
? List and provide specific examples of determinants of supply and 
elasticity of supply. 
? Describe the law of supply. 
? Describe the difference between movements on the supply curve and 
shift of the supply curve. 
? Explain the concept of elasticity of supply with examples. 
? Illustrate how the concepts of demand and supply can be used to 
determine price. 
 
3.0 INTRODUCTION 
In a market economy, sellers of products and services constitute the supply side. The sellers 
may include individuals, firms and governments. As the term ‘demand’ refers to the quantity 
of a good or service that the consumers are willing and able to purchase at various prices 
during a given period of time, the term ‘supply’ refers to the amount of a good or service 
that the producers are willing and able to offer to the market at various prices during a 
given period of time.  
Three important points apply to supply: 
(i) Supply refers to what a firm offer for sale in the market, not necessarily to what they 
succeed in selling. What is offered may not get sold. 
© The Institute of Chartered Accountants of India
 1.75 
 
 
 
 
2.75 THEORY OF DEMAND AND SUPPLY 
(ii) Supply requires both willingness and ability to supply. Production cost is often the 
primary influence on ability.  
(iii) Supply is a flow. Supply is identified for a specified time period. The quantity 
supplied is ‘so much’ per unit of time, per day, per week, or per year. 
3.1 DETERMINANTS OF SUPPLY 
Although price is an important consideration in determining the willingness and desire to 
part with commodities, there are many other factors which determine the supply of a 
product or a service. These are discussed below: 
(i) Price of the good: Other things being equal, the higher the relative price of a good 
the greater the quantity of it that will be supplied. This is because goods and services 
are produced by the firm in order to earn profits and, ceteris paribus, profits rise if 
the price of its product rises. 
(ii) Prices of related goods: If the prices of other goods rise, they become relatively 
more profitable to the firm to produce and sell than the good in question. When a 
seller can get a higher price for a good, producing and selling it becomes more 
profitable. Producers will allocate more resources towards its production even by 
drawing resources from other goods they produce.  For example, a rise in the price of 
comic books will encourage publishers to shift resources out of the production of 
other books (such as novels) and use them in the production of comic books. As 
another example, if price of wheat rises, the farmers may shift their land to wheat 
production away from corn and soya beans. It implies that, if the price of Y rises, the 
quantity supplied of X will fall. 
(iii) Prices of factors of production: Cost of production is a significant factor that 
affects supply. If the firm’s cost exceeds what it can earn from selling the good, the 
firm sells nothing. A rise in the price of an input causes a decrease in supply. When 
the cost of resources such as wages, raw material prices and interest rates increase, 
producers decrease the amount they are willing to supply. Lower input costs indeed, 
make production more profitable, encourage existing firms to expand production 
and new firms to enter the market. 
 A rise in the price of a particular factor of production will cause an increase in the 
cost of making those goods that use a great deal of that factor than in the costs of 
producing those that use relatively small amount of the factor. For example, a rise in 
the cost of land will have a large effect on the cost of producing wheat and a very 
small effect on the cost of producing automobiles. Thus, a change in the price of one 
© The Institute of Chartered Accountants of India
Page 3


  
  
 
 
BUSINESS ECONOMICS  
 
 
2.74 
 
 
LEARNING OUTCOMES 
UNIT -3: SUPPLY 
 
 
After studying this unit, you would be able to:  
? Explain the meaning of supply. 
? List and provide specific examples of determinants of supply and 
elasticity of supply. 
? Describe the law of supply. 
? Describe the difference between movements on the supply curve and 
shift of the supply curve. 
? Explain the concept of elasticity of supply with examples. 
? Illustrate how the concepts of demand and supply can be used to 
determine price. 
 
3.0 INTRODUCTION 
In a market economy, sellers of products and services constitute the supply side. The sellers 
may include individuals, firms and governments. As the term ‘demand’ refers to the quantity 
of a good or service that the consumers are willing and able to purchase at various prices 
during a given period of time, the term ‘supply’ refers to the amount of a good or service 
that the producers are willing and able to offer to the market at various prices during a 
given period of time.  
Three important points apply to supply: 
(i) Supply refers to what a firm offer for sale in the market, not necessarily to what they 
succeed in selling. What is offered may not get sold. 
© The Institute of Chartered Accountants of India
 1.75 
 
 
 
 
2.75 THEORY OF DEMAND AND SUPPLY 
(ii) Supply requires both willingness and ability to supply. Production cost is often the 
primary influence on ability.  
(iii) Supply is a flow. Supply is identified for a specified time period. The quantity 
supplied is ‘so much’ per unit of time, per day, per week, or per year. 
3.1 DETERMINANTS OF SUPPLY 
Although price is an important consideration in determining the willingness and desire to 
part with commodities, there are many other factors which determine the supply of a 
product or a service. These are discussed below: 
(i) Price of the good: Other things being equal, the higher the relative price of a good 
the greater the quantity of it that will be supplied. This is because goods and services 
are produced by the firm in order to earn profits and, ceteris paribus, profits rise if 
the price of its product rises. 
(ii) Prices of related goods: If the prices of other goods rise, they become relatively 
more profitable to the firm to produce and sell than the good in question. When a 
seller can get a higher price for a good, producing and selling it becomes more 
profitable. Producers will allocate more resources towards its production even by 
drawing resources from other goods they produce.  For example, a rise in the price of 
comic books will encourage publishers to shift resources out of the production of 
other books (such as novels) and use them in the production of comic books. As 
another example, if price of wheat rises, the farmers may shift their land to wheat 
production away from corn and soya beans. It implies that, if the price of Y rises, the 
quantity supplied of X will fall. 
(iii) Prices of factors of production: Cost of production is a significant factor that 
affects supply. If the firm’s cost exceeds what it can earn from selling the good, the 
firm sells nothing. A rise in the price of an input causes a decrease in supply. When 
the cost of resources such as wages, raw material prices and interest rates increase, 
producers decrease the amount they are willing to supply. Lower input costs indeed, 
make production more profitable, encourage existing firms to expand production 
and new firms to enter the market. 
 A rise in the price of a particular factor of production will cause an increase in the 
cost of making those goods that use a great deal of that factor than in the costs of 
producing those that use relatively small amount of the factor. For example, a rise in 
the cost of land will have a large effect on the cost of producing wheat and a very 
small effect on the cost of producing automobiles. Thus, a change in the price of one 
© The Institute of Chartered Accountants of India
  
  
 
 
BUSINESS ECONOMICS  
 
 
2.76 
factor of production will cause changes in the relative profitability of different lines of 
production and will cause producers to shift from one line to another and thus 
supplies of different commodities will change. 
(iv) State of technology: The supply of a particular product depends upon the state of 
technology also. The use of new technology in an industry (such as automation) 
increases production efficiency and reduces production costs. 
 Inventions and innovations tend to make it possible to produce more or better goods 
with the same resources, and thus they tend to increase the quantity supplied of 
some products and to reduce the quantity supplied of products that are displaced.  
Availability of spare production capacity and the ease with which factor substitution 
can be made and the cost of such substitution also determine supply. 
(v) Government Policy: Government rules and regulations affect how much firms want 
to sell or are allowed to sell. The production of a good may be subject to the 
imposition of commodity taxes such as excise duty, sales tax and import duties. 
These taxes raise the cost of production and so the quantity supplied of a good 
would increase only when its price in the market rises. Subsidies and other funding 
programmes to producers, on the other hand, reduce the cost of production and 
thus provide an incentive to the firm to increase supply. When government imposes 
restrictions such as import quota on consumer products and inputs, rationing of 
input supply etc, production tends to fall.   
(vi) Nature of competition and size of industry: Under competitive conditions, supply 
will be more than that under monopolized conditions. 
(vii) Expectations: Choices of firms in respect of selling the product now or later depends 
on expectations of future prices. Sellers compare current prices with future prices. An 
increase in the anticipated future price of a good or service reduces its supply today; 
and if sellers expect a fall in prices in future, more will be supplied now.  
(viii) Number of sellers: If there are large number of firms in the market, supply will be 
more. Besides, entry of new firms, either domestic or foreign, causes the industry 
supply curve to shift rightwards.   
Other Factors: The quantity supplied of a good also depends upon government’s industrial 
and foreign policies, goals of the firm, infrastructural facilities, natural factors such as 
weather, floods, earthquake and man- made factors such as war, labour strikes, communal 
riots etc.   
© The Institute of Chartered Accountants of India
Page 4


  
  
 
 
BUSINESS ECONOMICS  
 
 
2.74 
 
 
LEARNING OUTCOMES 
UNIT -3: SUPPLY 
 
 
After studying this unit, you would be able to:  
? Explain the meaning of supply. 
? List and provide specific examples of determinants of supply and 
elasticity of supply. 
? Describe the law of supply. 
? Describe the difference between movements on the supply curve and 
shift of the supply curve. 
? Explain the concept of elasticity of supply with examples. 
? Illustrate how the concepts of demand and supply can be used to 
determine price. 
 
3.0 INTRODUCTION 
In a market economy, sellers of products and services constitute the supply side. The sellers 
may include individuals, firms and governments. As the term ‘demand’ refers to the quantity 
of a good or service that the consumers are willing and able to purchase at various prices 
during a given period of time, the term ‘supply’ refers to the amount of a good or service 
that the producers are willing and able to offer to the market at various prices during a 
given period of time.  
Three important points apply to supply: 
(i) Supply refers to what a firm offer for sale in the market, not necessarily to what they 
succeed in selling. What is offered may not get sold. 
© The Institute of Chartered Accountants of India
 1.75 
 
 
 
 
2.75 THEORY OF DEMAND AND SUPPLY 
(ii) Supply requires both willingness and ability to supply. Production cost is often the 
primary influence on ability.  
(iii) Supply is a flow. Supply is identified for a specified time period. The quantity 
supplied is ‘so much’ per unit of time, per day, per week, or per year. 
3.1 DETERMINANTS OF SUPPLY 
Although price is an important consideration in determining the willingness and desire to 
part with commodities, there are many other factors which determine the supply of a 
product or a service. These are discussed below: 
(i) Price of the good: Other things being equal, the higher the relative price of a good 
the greater the quantity of it that will be supplied. This is because goods and services 
are produced by the firm in order to earn profits and, ceteris paribus, profits rise if 
the price of its product rises. 
(ii) Prices of related goods: If the prices of other goods rise, they become relatively 
more profitable to the firm to produce and sell than the good in question. When a 
seller can get a higher price for a good, producing and selling it becomes more 
profitable. Producers will allocate more resources towards its production even by 
drawing resources from other goods they produce.  For example, a rise in the price of 
comic books will encourage publishers to shift resources out of the production of 
other books (such as novels) and use them in the production of comic books. As 
another example, if price of wheat rises, the farmers may shift their land to wheat 
production away from corn and soya beans. It implies that, if the price of Y rises, the 
quantity supplied of X will fall. 
(iii) Prices of factors of production: Cost of production is a significant factor that 
affects supply. If the firm’s cost exceeds what it can earn from selling the good, the 
firm sells nothing. A rise in the price of an input causes a decrease in supply. When 
the cost of resources such as wages, raw material prices and interest rates increase, 
producers decrease the amount they are willing to supply. Lower input costs indeed, 
make production more profitable, encourage existing firms to expand production 
and new firms to enter the market. 
 A rise in the price of a particular factor of production will cause an increase in the 
cost of making those goods that use a great deal of that factor than in the costs of 
producing those that use relatively small amount of the factor. For example, a rise in 
the cost of land will have a large effect on the cost of producing wheat and a very 
small effect on the cost of producing automobiles. Thus, a change in the price of one 
© The Institute of Chartered Accountants of India
  
  
 
 
BUSINESS ECONOMICS  
 
 
2.76 
factor of production will cause changes in the relative profitability of different lines of 
production and will cause producers to shift from one line to another and thus 
supplies of different commodities will change. 
(iv) State of technology: The supply of a particular product depends upon the state of 
technology also. The use of new technology in an industry (such as automation) 
increases production efficiency and reduces production costs. 
 Inventions and innovations tend to make it possible to produce more or better goods 
with the same resources, and thus they tend to increase the quantity supplied of 
some products and to reduce the quantity supplied of products that are displaced.  
Availability of spare production capacity and the ease with which factor substitution 
can be made and the cost of such substitution also determine supply. 
(v) Government Policy: Government rules and regulations affect how much firms want 
to sell or are allowed to sell. The production of a good may be subject to the 
imposition of commodity taxes such as excise duty, sales tax and import duties. 
These taxes raise the cost of production and so the quantity supplied of a good 
would increase only when its price in the market rises. Subsidies and other funding 
programmes to producers, on the other hand, reduce the cost of production and 
thus provide an incentive to the firm to increase supply. When government imposes 
restrictions such as import quota on consumer products and inputs, rationing of 
input supply etc, production tends to fall.   
(vi) Nature of competition and size of industry: Under competitive conditions, supply 
will be more than that under monopolized conditions. 
(vii) Expectations: Choices of firms in respect of selling the product now or later depends 
on expectations of future prices. Sellers compare current prices with future prices. An 
increase in the anticipated future price of a good or service reduces its supply today; 
and if sellers expect a fall in prices in future, more will be supplied now.  
(viii) Number of sellers: If there are large number of firms in the market, supply will be 
more. Besides, entry of new firms, either domestic or foreign, causes the industry 
supply curve to shift rightwards.   
Other Factors: The quantity supplied of a good also depends upon government’s industrial 
and foreign policies, goals of the firm, infrastructural facilities, natural factors such as 
weather, floods, earthquake and man- made factors such as war, labour strikes, communal 
riots etc.   
© The Institute of Chartered Accountants of India
 1.77 
 
 
 
 
2.77 THEORY OF DEMAND AND SUPPLY 
3.2 THE LAW OF SUPPLY 
In general, producers are prepared to sell their product for a price if that price is at least as 
high as the cost to produce an additional unit of the product. Therefore, the willingness to 
supply depends on the price at which the good can be sold as well as the cost of production 
for an additional unit of the good. The greater the difference between those two values, the 
greater is the willingness of producers to supply the good. 
Supply refers to the relationship of quantity supplied of a good with one or more related 
variables which have an influence on the supply of the good. Normally, supply is related 
with price, but it can also be related with other factors such as the type of technology used, 
scale of operations etc. 
The law of supply can be stated as: Other things remaining constant, the quantity of a good 
produced and offered for sale will increase as the price of the good rises and decrease as 
the price falls. 
This law is based upon common sense, because the higher the price of the good, the greater 
the profits that can be earned and thus greater the incentive to produce the good and offer 
it for sale. The law is known to be correct in a large number of cases. There is an exception 
however. If we take the supply of labour at very high wages, we may find that the supply of 
labour has decreased instead of increasing. Thus, the behaviour of supply depends upon the 
phenomenon considered and the degree of possible adjustment in supply. 
The behaviour of supply is also affected by the time period under consideration. In the short 
run, it may not be easy to increase supply, but in the long run supply can be easily adjusted 
in response to changes in price. 
The law of supply can be explained through a supply schedule and a supply curve. A supply 
schedule is the tabular presentation of the law of supply. It shows the different prices of a 
commodity and the corresponding quantities that suppliers are willing to offer for sale, with all 
other variables held constant.   Consider the following hypothetical supply schedule of good X. 
Table 10: Supply Schedule of Good ‘X’ 
Price (`) (per kg) Quantity supplied (kg) 
1 5 
2 35 
3 45 
4 55 
5 65 
© The Institute of Chartered Accountants of India
Page 5


  
  
 
 
BUSINESS ECONOMICS  
 
 
2.74 
 
 
LEARNING OUTCOMES 
UNIT -3: SUPPLY 
 
 
After studying this unit, you would be able to:  
? Explain the meaning of supply. 
? List and provide specific examples of determinants of supply and 
elasticity of supply. 
? Describe the law of supply. 
? Describe the difference between movements on the supply curve and 
shift of the supply curve. 
? Explain the concept of elasticity of supply with examples. 
? Illustrate how the concepts of demand and supply can be used to 
determine price. 
 
3.0 INTRODUCTION 
In a market economy, sellers of products and services constitute the supply side. The sellers 
may include individuals, firms and governments. As the term ‘demand’ refers to the quantity 
of a good or service that the consumers are willing and able to purchase at various prices 
during a given period of time, the term ‘supply’ refers to the amount of a good or service 
that the producers are willing and able to offer to the market at various prices during a 
given period of time.  
Three important points apply to supply: 
(i) Supply refers to what a firm offer for sale in the market, not necessarily to what they 
succeed in selling. What is offered may not get sold. 
© The Institute of Chartered Accountants of India
 1.75 
 
 
 
 
2.75 THEORY OF DEMAND AND SUPPLY 
(ii) Supply requires both willingness and ability to supply. Production cost is often the 
primary influence on ability.  
(iii) Supply is a flow. Supply is identified for a specified time period. The quantity 
supplied is ‘so much’ per unit of time, per day, per week, or per year. 
3.1 DETERMINANTS OF SUPPLY 
Although price is an important consideration in determining the willingness and desire to 
part with commodities, there are many other factors which determine the supply of a 
product or a service. These are discussed below: 
(i) Price of the good: Other things being equal, the higher the relative price of a good 
the greater the quantity of it that will be supplied. This is because goods and services 
are produced by the firm in order to earn profits and, ceteris paribus, profits rise if 
the price of its product rises. 
(ii) Prices of related goods: If the prices of other goods rise, they become relatively 
more profitable to the firm to produce and sell than the good in question. When a 
seller can get a higher price for a good, producing and selling it becomes more 
profitable. Producers will allocate more resources towards its production even by 
drawing resources from other goods they produce.  For example, a rise in the price of 
comic books will encourage publishers to shift resources out of the production of 
other books (such as novels) and use them in the production of comic books. As 
another example, if price of wheat rises, the farmers may shift their land to wheat 
production away from corn and soya beans. It implies that, if the price of Y rises, the 
quantity supplied of X will fall. 
(iii) Prices of factors of production: Cost of production is a significant factor that 
affects supply. If the firm’s cost exceeds what it can earn from selling the good, the 
firm sells nothing. A rise in the price of an input causes a decrease in supply. When 
the cost of resources such as wages, raw material prices and interest rates increase, 
producers decrease the amount they are willing to supply. Lower input costs indeed, 
make production more profitable, encourage existing firms to expand production 
and new firms to enter the market. 
 A rise in the price of a particular factor of production will cause an increase in the 
cost of making those goods that use a great deal of that factor than in the costs of 
producing those that use relatively small amount of the factor. For example, a rise in 
the cost of land will have a large effect on the cost of producing wheat and a very 
small effect on the cost of producing automobiles. Thus, a change in the price of one 
© The Institute of Chartered Accountants of India
  
  
 
 
BUSINESS ECONOMICS  
 
 
2.76 
factor of production will cause changes in the relative profitability of different lines of 
production and will cause producers to shift from one line to another and thus 
supplies of different commodities will change. 
(iv) State of technology: The supply of a particular product depends upon the state of 
technology also. The use of new technology in an industry (such as automation) 
increases production efficiency and reduces production costs. 
 Inventions and innovations tend to make it possible to produce more or better goods 
with the same resources, and thus they tend to increase the quantity supplied of 
some products and to reduce the quantity supplied of products that are displaced.  
Availability of spare production capacity and the ease with which factor substitution 
can be made and the cost of such substitution also determine supply. 
(v) Government Policy: Government rules and regulations affect how much firms want 
to sell or are allowed to sell. The production of a good may be subject to the 
imposition of commodity taxes such as excise duty, sales tax and import duties. 
These taxes raise the cost of production and so the quantity supplied of a good 
would increase only when its price in the market rises. Subsidies and other funding 
programmes to producers, on the other hand, reduce the cost of production and 
thus provide an incentive to the firm to increase supply. When government imposes 
restrictions such as import quota on consumer products and inputs, rationing of 
input supply etc, production tends to fall.   
(vi) Nature of competition and size of industry: Under competitive conditions, supply 
will be more than that under monopolized conditions. 
(vii) Expectations: Choices of firms in respect of selling the product now or later depends 
on expectations of future prices. Sellers compare current prices with future prices. An 
increase in the anticipated future price of a good or service reduces its supply today; 
and if sellers expect a fall in prices in future, more will be supplied now.  
(viii) Number of sellers: If there are large number of firms in the market, supply will be 
more. Besides, entry of new firms, either domestic or foreign, causes the industry 
supply curve to shift rightwards.   
Other Factors: The quantity supplied of a good also depends upon government’s industrial 
and foreign policies, goals of the firm, infrastructural facilities, natural factors such as 
weather, floods, earthquake and man- made factors such as war, labour strikes, communal 
riots etc.   
© The Institute of Chartered Accountants of India
 1.77 
 
 
 
 
2.77 THEORY OF DEMAND AND SUPPLY 
3.2 THE LAW OF SUPPLY 
In general, producers are prepared to sell their product for a price if that price is at least as 
high as the cost to produce an additional unit of the product. Therefore, the willingness to 
supply depends on the price at which the good can be sold as well as the cost of production 
for an additional unit of the good. The greater the difference between those two values, the 
greater is the willingness of producers to supply the good. 
Supply refers to the relationship of quantity supplied of a good with one or more related 
variables which have an influence on the supply of the good. Normally, supply is related 
with price, but it can also be related with other factors such as the type of technology used, 
scale of operations etc. 
The law of supply can be stated as: Other things remaining constant, the quantity of a good 
produced and offered for sale will increase as the price of the good rises and decrease as 
the price falls. 
This law is based upon common sense, because the higher the price of the good, the greater 
the profits that can be earned and thus greater the incentive to produce the good and offer 
it for sale. The law is known to be correct in a large number of cases. There is an exception 
however. If we take the supply of labour at very high wages, we may find that the supply of 
labour has decreased instead of increasing. Thus, the behaviour of supply depends upon the 
phenomenon considered and the degree of possible adjustment in supply. 
The behaviour of supply is also affected by the time period under consideration. In the short 
run, it may not be easy to increase supply, but in the long run supply can be easily adjusted 
in response to changes in price. 
The law of supply can be explained through a supply schedule and a supply curve. A supply 
schedule is the tabular presentation of the law of supply. It shows the different prices of a 
commodity and the corresponding quantities that suppliers are willing to offer for sale, with all 
other variables held constant.   Consider the following hypothetical supply schedule of good X. 
Table 10: Supply Schedule of Good ‘X’ 
Price (`) (per kg) Quantity supplied (kg) 
1 5 
2 35 
3 45 
4 55 
5 65 
© The Institute of Chartered Accountants of India
  
  
 
 
BUSINESS ECONOMICS  
 
 
2.78 
The table shows the quantities of good X that would be produced and offered for sale at a 
number of alternative prices. At Re 1, for example, 5 kilograms of good X are offered for sale 
and at ` 3 per kg. 45 kg. would be forthcoming for sale. 
We can now plot the data in table 10 on a graph. In Figure 25, price is plotted on the vertical 
axis and quantity on the horizontal axis, and various price-quantity combinations of the 
schedule 10 are plotted. 
 
Fig. 25: Supply Curve 
When we draw a smooth curve through the plotted points, what we get is the supply curve 
of good X. The supply curve is a graphical presentation of the supply schedule. The supply 
curve shows the quantity of a good that producers are willing to sell at a given price, 
holding constant any other factor that might affect the quantity supplied. The supply curve 
is thus a relationship between the quantity supplied and the price. To be more precise, the 
supply curve shows simultaneously: 
(a) the highest quantity willingly supplied by the suppliers at each price and  
(b) the minimum price which will induce suppliers to offer the various quantities for sale  
The supply curve slopes upwards towards right (positive slope) showing that as price 
increases, the quantity supplied of X increases and vice-versa. This direct relationship 
between price and quantity is reflected in the positive slope of the supply curve.  
The market supply, like market demand, is the sum of supplies of a commodity made by all 
individual firms or their supply agencies. The market supply of a commodity gives the 
amounts of the commodity supplied per time period at various alternative prices by all the 
producers of this commodity in the market. It is derived by adding the quantity supplied by 
each seller at different prices. The market supply curve for ‘X’ can be obtained by adding 
horizontally the supply curves of various firms. The market supply is governed by the law of 
supply and depends on all the factors that determine the individual producer’s supply and, 
in addition, on the number of producers of the commodity in the market. 
© The Institute of Chartered Accountants of India