1. Lesson 11. THE PRINCIPLE OF SUPPLY
Learning outcomes
After studying this unit, you should be able to:
Meaning of supply Difference
between supply and stock
Relationship between supply and price
Define the concept of elasticity of supply
locate the determinants of elasticity of supply
Introduction:
Friends after knowing the meaning and purpose of demand
and law of demand, elasticity of demand, know I think you should know what
supply is. Producers are going to produce on the basis of demand only.
Goods are needed to be supplied to meet the demand for the product.
Difference between Stock & Supply:
Like the term 'demand', the term 'supply' is also often misused in the
ordinary language. Supply of a commodity is often confused with the 'stock'
of that commodity available with the producers. Stock 'of a commodity, more
or less, will equal the total quantity produced during a period less the
quantity already sold out. But we know that the producers do not offer whole
of their stocks for sale in the market, A part of industrial produces is kept back in
godowns and is offered for sell in the market when It can fetch better prices, In other
words the amount offered for sale may be less (or at the most in rare
circumstances equal to) than the stocks of the commodity. The term 'supply'
shows a relationship between quantity and price. By supply we mean
various quantities of a commodity which producers will offer for sale at
a particular time at various corresponding prices. In simple words,
supply ( like demand ) refers to the quantity of commodity offered for sale
at some price during a given period of time.
FACTORS ON WHICH SUPPLY OF A COMMODITY DEPENDS
It is also known as the determinants of supply. The Important determinants of
supply can be grouped together in a supply function as follows: ..
SN=f (PN,PR,F,T,G )
Supply function describes the functional relationship between supply of a
commodity (say N) and other determinants of supp1y, i.e., price of the
commodity (PN), price of a related commodity (P R), prices of the factors of
production (F), technical know-ho" (T) and goals or general objectives of the
Producer. Each of the_ factors influences supply in a different' way. To isolate
the effect of other factors we take these other factors as constant while
considering the relationship between supply and one of the above variables. For
example, if we want to study the relationship between price and supply of

2. commodity, N, we shall assume other factors PR, F, T and G to remain constant
or unchanged. We study below these relationships
1) Price of the commodity, expressed as SN ft PN), i. e. other things
being equal, supply of commodity N depends upon the price
of commodity N. This sort of relationship is studied in what has' come
to be popularly known as the Law of Supply'. It implies that if the price
of a commodity goes up, its supply shall expand and vice versa.
2) Prices of related goods, expressed as SN = f(P R), 'j e., other things
being equal, supply of commodity N depends upon the prices of
the related goods. If the price of a substitute goes up, producers
would, be tempted to divert their available resources to the
production of that substitute.
3) Prices of factors of production, expressed as SN f(F), i, e, other
things being equal, supply of a commodity depends upon the prices of
factors of production. A rise in the price of one factor of production, will
cause a consequent increase in the cost of producing those
com- modities which use a great deal of that factor and only a small
increase in the costs of producing those commodities that use a small
amount of the factor.
4) State of technology, expressed as SN=f(T), i,e., the supply of a
commodity depends upon the state of technology. Over the the time
the technical know-how changes. Goals of firms, expressed as SN
1(6), j e., other things being equal the supply of a commodity depends
upon the ,goals of firms producing that commodity. Ordinarily; every
firm tries to attain. Maximum profits. Natural factors. The supply of the
agricultural' goods to a great extent depends upon the natural
conditions. Adequate rain, fertility of land irrigation facilities, favorable
climatic conditions etc., help in raising the supply of
agricultural produce., Contrary to that, heavy rains, floods, drought
conditions, etc., adversely affect the agricultural production.
5) Means of transportation and communication. Proper development of
means of transportation and communication helps in maintaining
adequate supply of the commodities. In case of short Supply,
goods can be rushed from the, surplus areas to the deficient areas.
But if the developed means of transportation are used to export
goods, it will create scarcity of goods .In the domestic market.
6) Taxation Policy. Imposition of heavy taxes on a commodity
discourages its production, and as a remit its supply diminishes.
On the other, hand, tax concessions of various kinds induce producers
!o raise the supply.
7) Future expectations of rise in prices. If the producers expect, an
increase in the price in the near future, then they will curtail the current
supply, so as to offer more goods in future at higher prices.
LAW OF SUPPLY

3. Meaning:
It’s different from law of demand. Law of supply explains the
relationship between price of a commodity and its quantity supplied. Price
and supply are directly related. A rise in price induces producers to supply
more quantity or the commodity and a fall Prices, makes them reduce the
supply. The higher is the price of the commodity the larger is the profit that can
be earned, and, thus the greater is the incentive to the producer' to
produce more of the commodity and offer It in the Market. Likewise at
lower prices, profit margin shrinks and hence producers reduce the sale .
Supply schedule and supply curve
Law of supply can be illustrated with the help of a, schedule and supply curve. A
supply schedule is a tabular statement that gives a full account of supply of any
given commodity in a given market at a given time
It states what the volume of goods offered for sale would be at each of a series of
prices. SupplySupply schedule, types:
(1) individual schedule is of two
2) market supply schedule.
Individual supply schedule states the quantities of a commodity a producer would
offer for sale at various prices. Suppose M/s. A.B.C. Ltd. are willing to sell 10,000
units of their product per week at price of Rs- 4 each. If the price goes up to Rs. 5
each, they may be willing to sell 12,000 units, and at Rs. 6 each, 15,000 units.
We record this relationship in Table 14'8. With the increase in price, the quantity
supplied increases and vica versa. A market supply schedule1 furnishes exactly
the same information.
A market supply schedule for a given commodity is the sum of individual supply
for all those firms which are engaged in the production of a given
commodity during a given period.
The market supply curve can be obtained by aggregating the individual
supply curves of the commodity.
The market supply curve also shows the same relationship between the
price and the quantity supplied the quantity supplied increases proportionately
with the increase in the/price
Activity
Qs=20p-100
So that at the price Rs. 1O/ per unit quantity supplied equals 20 x 10 - 100=100
at the price Rs 9 per unit 80 units will be supplied; Similarly different quantities
corresponding to different prices can be calculated.
SHIFT IN SUPPLY

4. Movement along the same supply curve represents contraction or expansion in
supply as a result of a change in the price of a commodity. A shift in supply curve
occurs when the producers are wi1ling to offer more or less of a
commodity because of reasons other than the price of the commodity.
For example. An innovation or the discovery of a cheap raw material may result
in increased supplies of a given commodity. Increase in the supply of
plastic footwear in recent years is glaring illustration.
This change in supply which occurs because of a change in any
of the determinants of supply, other than the price, is known as increase or
decrease in supply,
(1 ) Increase in demand also increases the price the quantity sold and purchased
also increases
(2) Fall in demand brings down the equilibrium price and the quantity sold
and purchased also declines.
Increase in Supply.
(1) Shift in the supply curve to the right (increase in supply). brings down
the equilibrium price; the amount sold and purchased increases.
Activity:
I. Mathematically, the effect of the shift in demand can be presented as follows:
Suppose, the original demand equation is Qd=110-lOp and, the original supply
equation is Q.=10p-l00 The equilibrium price and the equilibrium quantity will be
7 and 40 respectively.
Suppose, the new demand equation, exhibiting an increases in demand is
Qd=140 - 10p
and the supply equation remains unchanged. The new equilibrium will be
determined as fol1ows :
140 - 10p=20p-100
OR
30p=240 . :.
p=8
. -'.
Substituting p=8 to either the demand or supply equation we get the
equilibrium quantity as 60.
2. Mathematically, this effect can be shown as follows:
Suppose the supply equation changes to
Qs=20p - 40
And the demand equation remains unchanged
Qd=110 - 10p

5. (2) Shirt in the supply curve to left ( fall in supply ) increases the equilibrium
price. The quantity sold and purchased diminishes.
Simultaneous change in the Demand and the Supply
So far we have been discussing the effect of change either in demand or
in supply on the equilibrium price and the quantity sold and purchased. It
is also possible that demand and supply may change simultaneously
We may discuss the change in both the demand and the supply as follows:
1) If the increase or decrease in the demand and the supply is pf equal
magnitude, then the price at old and new equilibrium will remain equal.
2) If the increase in the demand is of greater magnitude than in supply, then
the new equilibrium price will be higher than the old equilibrium price, and
vice versa.
3) If the supply increases in greater proportion than the demand, the
new equilibrium price will be lower than the old equilibrium price.
It may be observed in all the conditions that the price mechanism brings demand
and supply in equilibrium.
The new equilibrium price will be
110-10p=20p-40
Or 30p= 150
Or p=5
Substituting p=5 in either of the equations we get the equilibrium quantity as 60,
i.e. increase in supply leads to a fall in price, but the quantity demanded and
supplied increase.
QUESTIONS
1. Distinguish between substitution and income effects of a price change.
2. Why does demand curve always slope downwards from left to right ? Are there
any exceptions to it ? Explain with example.
3. Distinguish between 'change in demand' and 'change io quantity demanded'
Bring out the factors which cause change in demand. .
4. Discuss the, law of supply with the help of a schedule, and a curve. What are
the factors on which the supply of a commodity depends?
5. Is the equilibrium price always stable 1 What is the effect of the
following changes on the equilibrium price:
(1) When the demand of a commodity alone increases.
(2) When the supply of a commodity alone increases.

6. (iii) When the demand and supply both increase.
Meaning of ELASTICITY OF SUPPLY
Meaning :
Like demand, quantity supplied of different commodities responds
in different proportions to the price changes. For example, if the price of
wheat rises. the farmers may be tempted to sell more in the market, and keep
less for themselves. On the other hand, if the price of cars rises, the car
manufacturers may not probably be in a position to offer more cars for sale,
because they may not be keeping stocks of cars. Similarly, supply of cloth may
increase in response to the increase in prices and so on. Elasticity of supply of a
commodity measures changes in the quantity supplied as a result of
a change in the price of commodity.
Elasticity of supply is measured as a percentage change in amount supplied
divided by the percentage change in price of the commodity. In short,
Es= Percentage change in quantity supplied.
Percentage change in price
Es= ( ∆q / q ) X ( p / ∆p ) OR (∆q/∆p) X ( p/q )
where p and q are the original price and quantity supplied respectively, and ∆p
and ∆q the change in price and quantity supplied.
This method of measurement of the elasticity of supply can be illustrated
as follows:
Suppose, a producer is willing to supply 100 quintals of wheat at the price of
Rs. 110 per quintal If the price increases to Rs. 120 per quintal, he is willing to
supply 25 quintals of wheat. Calculate the elasticity of supply of wheat.
Elasticity of supply of wheat will be calculated as fol1ows :
Es= (∆q/∆p) x ( p/q ) = (25/10) x ( 110/100 ) = 2.75
Es=2.'75 will mean that if the price of wheat goes up by one per cent supply
of wheat will increase by 2.'75 per cent. The value of elasticity coefficient
varies between zero and infinity. The various results are tabulated below:

7. Elasticity of Supply
Elasticity Terminology Description
Less than
1. Es=Zero Perfectly inelastic unit2.Es<lelastic
or inelasticUnit
elastic3.Es=l4.E
s>lMore than unit
elasticPerfectly
elastic5.Ese;:
Quantity
supplied does
not change.
Quantity
supplied
changes by a
smaller
percentage
change than
price.
Quantity
supplied
changes in the
same
proportion as
price.
Factors Influencing Elasticity of Supply
Elasticity of supply depends upon a number of factors, some
of which are as follows:
1.Nature of the Commodity. The first and foremost
determinant of the elasticity of supply is the nature of the

8. commodity. Commodities on the basis of their nature can be
classified as (1 ) perishable, ,and (ii) durable. Perishable
products cannot be stored, and hence their supply does not'
respond in an effective manner to the change in their price.
Hence, their supply is inelastic in nature. Durable products,
on the other hand, can be stored; hence, their supply is
generally elastic, i,e., 'supply responds to the change in
prices.
2.Time. Supply of a commodity, in the ultimate analysis,
depends upon its production. Production always involves a
time-lag which may. vary from a few days 10 a few years,
Moreover, increased production of a commodity may
contemplate a change in the very size (If the plant, which in
turn may be a long, time-consuming process. Hence,
supply of a commodity may be less elastic in the short run,
as time progresses supply may become more elastic.

9. 3. Techniques of Production. Simple techniques of production are, by and
large, less expensive in nature, If demand conditions so require, the production
and the supply of such commodities as involve simple: techniques of production
could be easily increased. In other words, supply of such like commodities is
generally elastic in nature, On the other hand, if the technique of production of a
commodity is cumbers me, complex and time-consuming in nature it may not
be possible to change the supply in response to varying price-demand
conditions. Supply of such commodities would generally be Jess elastic,
4. Estimates of Future Prices. Future expectations of price changes may
also inl1ucllcc supply of a commodity. If the producers expect the prices
to, rise in future they may hold on to the stocks or the commodities and

10. POINTS TO PONDER
Slide 1 ___________________________________
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supplysuppl ___________________________________
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Meaning:g: by supplyly we mean various quantities
of commoditiesco which producers will offer for sale at a ___________________________________
particular time at variousva correspondingpoi pricesi.
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Slide 2
Supply functiontion ___________________________________
Sn = f ( Pn, Pr, F, T, G)G) Where Sn = supply
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of a commodityco ___________________________________
Pn = price of a commodity Pr = pricepr
of related goods F = factorsor of ___________________________________
productionstion T = technical know how
___________________________________
G = goals or general objective of
producers ___________________________________
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Slide 3
DeterminantsDe of supply
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Price of the commodity Price of
related goods
___________________________________
Prices ofof the factors of production
Technical know how ___________________________________
Goals oror general objectiveje ofof theth firm
Natural factorsct ___________________________________
TaxationTax policies Future expectation of
rise in price
Means of transportation andan communicationat

11. Slide 4Law of supplyit explainsns thethe relationshiptiobetween price ofa ___________________________________
commodityity and itsit quantity suppliedlie.Slide 5Assumptionstion of law of
Slide 7Supply curvesupply curve exhibits
supplyBased on theth assumption thatat thereth is directrelationship betweentw priceice
theth informationgraphicallyhiinsteadinsof
and supply.i.e. with increaseinin priceice supply isincreasingng and withwi decreasedein
arithmeticallyithmically. Itshows theth
priceprisupply is decreasing.Slide 6Supply schedulesca supply schedule
relationshiptibetweentwprice andantheth
is a tabulartastatementthat gives a full account of supply of anyangiven commodity quantityantity supplied.Slide 8Shiftif inin
in a given marketet atat agiven supply curveA shift in supplypp curvecur
time___________________________________ occursccu when theproducersuc are
willingillin to offerfe more or lessleof a
___________________________________
commodity because of reasons otherthan
___________________________________ the priceic ifif thethe commodityity.It is
also known as the increase or decreasein
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supply.______________________________
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