Supply - Economics | SSC CGL Tier 2 - Study Material, Online Tests, Previous Year PDF Download

Introduction

This chapter is numerically focused, providing an in-depth exploration of supply, including determinants of individual supply and market supply, the law of supply, movement along the supply curve, shifts in supply, reasons, and exceptions to the law of supply, as well as price elasticity of supply and its measurement. The chapter also delves into factors influencing price elasticity of supply and introduces the concept of time horizon.

1. Understanding Stock:

• Stock refers to the total quantity of a specific commodity available with a firm at a particular moment.

2. Concept of Supply:

• (a) Supply is the quantity of a commodity that a firm is willing and able to offer for sale at various prices during a specific timeframe.
• (b) Supply represents the portion of stock actively brought into the market for sale. Stock is always equal to or greater than supply.
• (c) For instance, if a seller has 50 tonnes of sugar in stock but is willing to sell only 30 tonnes at Rs. 37 per kg, then the supply is 30 tonnes out of the total stock of 50 tonnes.

3. Understanding Market Supply:

• Market supply pertains to the quantity of a commodity that all firms are willing and able to offer for sale at various prices during a specific period.

Factors Influencing Individual Supply

(a) Price of the Commodity:

• There is a positive correlation between the price of a commodity and its individual supply.
• This implies that as the price of the commodity increases, the individual supply also increases, and vice versa.

(b) Price of the Factors of Production:

• The price of factors (rent, wages, interest, profit) plays a crucial role in determining individual supply as it constitutes the cost of production.
• An increase in the price of a factor of production may result in a decrease in commodity production, shifting the individual supply curve to the left.
• Conversely, a producer may supply more of a commodity at a given price if the prices of factors fall, leading to a rightward shift in the individual supply curve.

(c) State of Technology:

• Technological progress within a firm decreases production costs, enhancing the profit margin and shifting the individual supply curve rightward.
• Goods produced with outdated and inferior technology, causing an increase in production costs, may lead to a decrease in total output and a leftward shift in the individual supply curve.

(d) Unit Tax:

• A unit tax, imposed by the government per unit sale of output, influences individual supply.
• For instance, if the unit tax is ? 3 and the firm sells 20 units, the total tax paid to the government is 20 * 3 = 60.
• An increase in unit tax raises the firm's cost of production, shifting the individual supply curve leftward. Conversely, a decrease in unit tax lowers production costs, shifting the individual supply curve rightward.

(e) Price of Other Goods:

• If a firm produces multiple products, an increase in the price of other goods prompts the firm to produce more of those goods to maximize profit and less of goods with unchanged prices.

(f) Objective of the Firm:

• Occasionally, a firm may increase the individual supply of a commodity not purely for profitability but for the status and prestige it brings in the market.
• Similarly, a firm may boost production to achieve objectives like maximizing sales or employment.

Factors Influencing Market Supply

(a) Price of the Commodity:

• The price of the commodity itself is a fundamental factor influencing market supply.

(b) Price of the Factors of Production:

• The costs associated with factors of production (rent, wages, interest, profit) play a significant role in determining market supply.

(c) State of Technology:

• Technological advancements within the industry can impact the overall market supply, either enhancing it through cost reduction or limiting it with outdated technology.

(d) Unit Tax:

• The imposition of unit taxes, levied per unit of output, affects market supply by influencing the production costs incurred by firms.

(e) Price of Other Goods:

• The prices of other goods in the market can have an impact on the supply of the commodity in question.

(f) Objective of the Firm:

• The goals and objectives of individual firms contribute to the overall market supply.

(g) Number of Firms in the Market:

• An increase in the number of firms in the industry generally leads to an increase in market supply, given the larger number of producers.
• Conversely, if firms exit the industry due to losses, market supply decreases.

(h) Future Expectation Regarding Price:

• Anticipated changes in future prices can influence current market supply.
• If sellers expect a price rise in the future, current supply may decrease to release supply later at higher prices. Conversely, if sellers anticipate future price drops, they may increase present supply to avoid potential losses.

(i) Means of Transportation and Communication:

• Adequate infrastructure development, including improvements in transportation and communication, contributes to maintaining a sufficient supply of the commodity in the market.

Defining the Supply Function

The supply function serves as a mathematical expression elucidating the connection between the quantity supplied of a product or service, its price, and additional factors like costs associated with related products and input costs. This function encompasses an array of dependent and independent variables. Construction of the supply equation involves a thorough examination of the relationship between the independent variable and the supply, considering whether the correlation is negative or positive. Notably, market price and supply generally exhibit an inverse relationship, while supply and technological advancements tend to demonstrate a positive correlation; for instance, enhanced technology frequently leads to an augmented supply.

The supply function can be written as, Sx = f (Px , P0 , Pf, St , T, O)
Where:
S_x = Supply of the given commodity x.
P_x= Price of the given commodity x.
P₀ = Price of other goods.
P_f = Prices of factors of production.
S_t= State of technology.
T = Taxation policy.
O = Objective of the firm.

Key Determinants of Supply

Several factors influence the supply of a product or a service, including:

• Organizational objectives.
• Cost of production factors.
• Technological advancements.
• Governmental policies.
• Market expectations.
• Prices of other commodities.
• The number of producers.
• Environmental conditions.
• The commodity's price.

Organizational Objectives

• The supply of goods is also influenced by the goals of an organization. An organization may have various objectives, such as maximizing sales, maximizing employment, or maximizing profits.
• If an organization's primary goal is to maximize profits, it will increase the supply of goods when profits are high and decrease the supply when profits are low.

Cost of Production Factors

• The cost of production factors, such as land, labor, capital, and entrepreneurship, also play a significant role in determining the supply of goods. When the cost of these factors is low, the cost of production is also low, which encourages organizations to supply more goods in the market.

Technological Advancements

• Adopting new technology can help firms save resources and reduce production costs, enabling them to produce and supply more goods.

Governmental Policies

• Government policies, subsidies, and taxation rebates can also have a significant impact on the supply of goods. High taxes can discourage producers from manufacturing more goods, thereby reducing supply. Conversely, when the government provides financial aid, subsidies, and tax rebates to producers, it encourages them to increase production, which in turn increases supply.

Market Expectations

• Producers' expectations about future price changes can also affect the supply of goods. If producers anticipate a price increase in the future, they may withhold goods to sell them at higher prices later, resulting in a decrease in supply. Conversely, if they expect a price drop, they may increase the supply of goods.

Prices of Other Commodities

• The prices of related goods can also affect the supply of a commodity. An increase in the price of a complementary good can increase its supply, and a rise in the price of a substitute good can decrease the supply of the commodity.

Number of Producers

• The number of producers in the market can also influence the supply of goods. An increase in the number of producers can lead to an increase in the supply of goods.

Environmental Conditions

• Environmental factors like weather conditions, natural disasters, and pest infestations can also affect the supply of goods. Favorable conditions can increase supply, while unfavorable conditions can decrease it.

The Commodity's Price

• The price of the commodity is one of the most crucial determinants of supply. When the price of a commodity is high, producers are motivated to sell more, increasing the supply. Conversely, when the price is low, the supply of the commodity decreases due to the direct relationship between the price of a commodity and its supply.

Law of Supply

Individually, our constant pursuit is to enhance our profit margins. Clearly, just as we seize opportunities to gain more value, suppliers exhibit a similar behavior. This phenomenon aligns with the principle known as the law of supply.

• As highlighted in the introduction, individuals with average intellect consistently seek ways to augment their profits. Turning our attention to suppliers, when a supplier receives a higher price for their goods, the natural inclination is to increase the supply, aiming to maximize profits. This inclination is encapsulated in the law of supply.
• Technically, the law of supply posits that, with other factors held constant, the quantity of a good produced and offered for sale will rise with an increase in its price and decrease as the price declines.
• Therefore, the law of supply serves as a link between the supply of a commodity and its price. It establishes a direct relationship between the supply of a commodity and its price.
• This law aligns with common sense, as higher prices provide suppliers with the incentive to pursue greater profit margins, thereby motivating an increase in supply.
• While this law holds true for the majority of daily supply occurrences, there are exceptions. For instance, the supply of labor at higher wages may decrease instead of increasing, contingent on the scarcity of a particular skill.
• Moreover, the dynamics of supply are subject to the element of time. In the short run, supply adjustments are limited within a specific timeframe. Conversely, in the long run, substantial changes come into play, enabling more extensive alterations to the supply. The graphical representation of the law of supply, embodied in the supply curve, is depicted below.