Supply is a fundamental concept in economics, playing a crucial role in determining market equilibrium. Understanding its definition, determinants, and function is essential for comprehending how markets operate.
What is Supply?
Supply refers to the quantity of a good or service that producers are willing and able to offer for sale at various prices during a specific period. It’s not simply the total amount available, but rather the amount producers are ready to sell.
Supply has three important aspects, which are as follows:
- Supply is always referred in terms of price
The price at which quantities are supplied differs from one location to the other. For example, fast moving consumer goods (FMCG) are usually supplied at different prices in different prices. - Supply is referred in terms of time
This means that supply is the amount that suppliers are willing to offer during a specific period of time (per day, per week, per month, bi-annually, etc.) - Supply considers the stock and market price of the product
Both stock and market price of a product affect its supply to a greater extent. If the market price of a product is more than its cost price, the seller would increase the supply of the product in the market. However, a decrease in the market price as compared to the cost price would reduce the supply of product in the market.
Supply Definition
Economist has given different supply definition but the essence is same.
Supply may be defined as a schedule which shows the various amounts of a product which a particular seller is willing and able to produce and make available for sale in the market at each specific price in a set of possible prices during a given period.
– McConnell
Supply refers to the quantity of a commodity offered for sale at a given price, in a given market, at given time.
– Anatol Murad
Classification of Supply
Supply can be classified based on various criteria, including:
- Time Period:
- Short-run supply: The supply where at least one factor of production is fixed.
- Long-run supply: The supply where all factors of production are variable.
- Market Scope:
- Individual supply: The supply offered by a single producer.
- Market supply: The total supply offered by all producers in the market.
Types of Supply
- Market Supply
- Short-term Supply
- Long-term Supply
- Joint Supply
Determinants of Supply
Several factors influence the quantity supplied. These determinants can cause shifts in the supply curve.
1. Price of a Product
The most direct determinant. Generally, a higher price encourages producers to supply more, while a lower price discourages supply.
2. Cost of Production
Increased production costs (e.g., raw materials, labor) reduce profitability and thus decrease supply. Conversely, lower costs increase supply.
3. Natural Conditions
For agricultural products, weather conditions (e.g., rainfall, temperature) significantly impact supply. Favorable conditions increase supply, while unfavorable conditions decrease it.
4. Transportation Conditions
Efficient transportation allows for wider distribution and increased supply. Poor transportation can limit supply.
5. Taxation Policies
Higher taxes increase production costs, leading to decreased supply. Lower taxes encourage supply.
6. Production Techniques
Technological advancements and improved production techniques enhance efficiency and increase supply.
7. Factor Prices and Their Availability
Changes in the price and availability of factors of production (land, labor, capital) affect the cost of production and, consequently, the supply.
8. Price of Related Goods
If the price of a substitute good (a good that can be produced using the same resources) increases, producers may shift production, decreasing the supply of the original good.
9. Industry Structure
The number of firms in the industry, the level of competition, and barriers to entry influence the overall market supply.
Supply Function
Supply function is the mathematical expression of law of supply. In other words, supply function quantifies the relationship between quantity supplied and price of a product, while keeping the other factors at constant.
The law of supply expresses the nature of the relationship between quantity supplied and price of a product, while the supply function measures that relationship.
The supply function can be expressed as:
Qs = f (Pa, Pb, Pc, T, Tp)
Where,
Qs = Supply
Pa = Price of the good supplied
Pb = Price of other goods
Pc = Price of factor input
T = Technology
Tp = Time Period
According to the supply function, the quantity supplied of a good (Qs) varies with the price of that good (Pa), the price of other goods (Pb), the price of factor input (Pc), the technology used for production (T), and time period (Tp).
Leave a Reply