One of the basic concepts of economics is supplied. Supply states the number of goods and services which are present for the consumers. In order to present supply on the graph, it can be related to the quantity of goods or services available at a specific price. Further, the supply has a direct relation with the demand for goods or services at a specific price. In case, the supply and demand of goods and services equalize, then the producer will increase the price of goods because every producer wants to attain the level of maximum profit.
- 1 Meaning and Definition of Supply
- 1.1 Supply Function
- 1.2 Determinants of Supply
Meaning and Definition of Supply
Supply refers to the schedule of the quantities of a good or service during a specific period of time that will be offered for sale at various prices. Thus, supply is defined always at a price and at a specific period of time. For example, the price of crude oil is changed every day and hence, the supply of crude oil is defined on the basis of I daily prices. When the price of a commodity is high then the producer or seller will supply a greater amount of the commodity. On the other hand when the price of a commodity is low then the producer or seller will supply less amount of the commodity.
According to Thomas, “The supply of goods is the quantity offered for sale in a given market at a given time at various prices”.
According to Meyers, “Supply means the amount offered for sale at a given price”.
A factor of production is supplied by the individuals to the firms. The factor of production is converted into consumable goods by•the firms which are the group of individuals. In the production process, the supply of factors of production depends not only on an individual’s decisions but also it is based on the firms’ capability to convert these factors into consumable goods. The supply of goods which is categorized as non-produced is directly associated with the goods market. For example, banks provide various services such as taking deposits, lockers. facility and so on, to the customers.
supply of a good or service is defined under the assumption that if other factors remaining the same then the amount. of goods or services which is offered by the seller at various prices at a specific time period. The amount of goods and services supplied by the seller or producer is not only affected by the price but also affected by the various factors such as the prices of other commodities, the price of factors of production, the objectives of producers or sellers and the level of technology used. The equation which is formed with the use of these i factors is called supply function. Supply function can be represented as follows: S. =f (Px, Py, C, T, 0, F, W, N, T)
Determinants of Supply
The following are the factors that determine the supply:
1) Product Price (Px):
If the other factors remaining constant then the number of goods which are supplied by a seller is directly related to the price. Usually, the producer increases the supply of goods and services to get’ more profit in the situation when prices are increased. The producers are encouraged to supply goods and services because of earn higher revenue from sales.
2) Prices of Related Products (P5):
Prices of goods related to production influence the firms to supply goods and services. For example, suppose the sellers of pizza notice that the price of hot dogs increases substantially. They may reduce the number of resources devoted to the selling of pizza in favor of hot dogs. This will decrease the supply of pizza. If the sellers were already selling two (or more) goods, the change in market conditions would prompt them to reallocate their resources towards the more profitable ones. The price of a complementary good is expected to affect the supply of the goods under consideration in a direct manner. For example, if the price of computer hardware increases, other things remaining constant, the supply of software would increase and vice versa. This is due to the reason that, an increase in the price of computer hardware increases its supply which results in an increase in the supply of software.
3) Costs and Technology (C and T):
If two factors are closely related then they can be treated as one. The cost of the factors which are used in the production process is known as costs. If other things remain constant then any increase in factor price increases the cost of the production. In this situation, the firm decreases the supply. For example, an increase in the price of labor will increase the cost of production. As a result, the supply of the product is decreased because sellers may charge more than before for any quantity supplied. For reducing the unit cost of production or increasing factor productivity technological improvement or innovations are introduced. Technological improvement reduces the total cost and it increases the supply of the product or services.
4) Objectives of the Firm (0):
Firms set various goals to achieve. The objective of the firm influences the quantity of the goods or services which are supplied. For example, if the objective of the firm is to maximization of sales then the firm supplies more amount of goods or services in comparison to the firm whose objective if maximization of profit.
5) Future Expectations (F):
As the demand is affected by consumer’s expectations, similarly, supply is influenced by the seller’s expectation. There are various factors such as expectations of prices, costs, sales, and the general macroeconomic conditions whirls affect the supply. For example, if a seller expects that the price of the goods or services will be increased in the future then he decreases the market supply to gain more profit. Similarly, if the seller expects that the production cost will be increased in the future then he increases the market supply to avoid the decrease in profit margin.
6) Weather Conditions and Other Short-Term Factors (W):
The supply of goods or services is adversely affected by the various short-term factors such as floods, droughts, strikes, lockouts, etc. The supply of refrigerator and air-conditioner has a tendency to increase in the summer because there are limited buyers in other months and there are additional carrying costs of inventory. The supply of agricultural goods is reduced in the condition of floods and droughts. The supply of industrial goods is negatively affected by the situation of strikes and lock-outs.
7) Number of Sellers (N):
The supply of goods or services is directly affected by the number of sellers. The market supply is directly correlated with the number of sellers. If the number of sellers is high then the market supply will be greater. In the condition when sellers make a mutual agreement then they restrict the supply to obtain more profit. In the condition when there is competition among the seller then they increase the supply to capture larger market share.
8) Taxation Policy (T):
If heavy taxes are imposed on a commodity then the production will be discouraged and resulting from this the supply will also be reduced. On the other hand, if there are various tax discounts are available then it encourages the producer to increases the supply.