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LAW OF SUPPLY

SCHEDULE AND
DIAGRAM
SUPPLY
 Definition

Quantity of product brought for sale at


a price during a particular period of time.

 Basis of Supply.
BASIS OF SUPPLY
Reservation Price
 Cost of Production.
 Nature of Product.
 Need for money.
 Expectation regarding future price.
 Time required for varying supply.
 Holding Capacity.
 Warehousing Costs/Facilities.
DETERMINANTS OF SUPPLY
1. TECHNOLOGY.
 The Way commodity is Produced.

 New innovation of Products.

Ex. Plastic :Due to various varieties of Plastic


available results in decline in supply of many
traditional products like Bamboo-Baskets.
DETERMINANTS OF SUPPLY
1. INPUT PRICES
 Prices of raw material and factors of
production

 Pinput α 1/S
DETERMINANTS OF SUPPLY
1. GOVT. TAXES & SUBSIDIES.
 Levy taxes on commodities includes
Excise, Customs duty, Sales tax etc.
 Indirect Taxes α Supply

Ex. If excise is increased; the Producers


realizes lower price from the given price
in market.
DETERMINANTS OF SUPPLY
1. PRICE OF RELATED GOODS.

 Price of Related commodities Y


increases; Thus, Producer of X would
tend to devote more resource to
Production of Y and less in X; therefore
supply of X at given price may fall.
DETERMINANTS OF SUPPLY
1. EXPECTATION ABOUT FUTURE.
E α 1/S
 If Producer expect higher price;

they would tend to postpone its sale


and reduce supply.
 If they expect a fall in the Price of X;

they would increase their current


supply.
THE LAW OF SUPPLY
 Other things remaining constant,
there is a direct relationship between
the quantity supplied of a commodity and
its price.

QαP
THE SUPPLY SCHEDULE.
 Changes in supply to Quantity Price
changes in price. Supplied (Rs/Kg)
 Ex: Supply of (Kg/day)
Mangoes in a local 100 6
market.
120 7
140 8
160 9
180 10
THE SUPPLY CURVE
10

8
Price (Rs/Kg)

0
100 120 140 160 180

Quantity Supplied (Kg/day)


THE SUPPLY SCHEDULE.
 Changes in supply to Price Supply
changes in price. (Rs/Kg) (Kg)
 Ex: Supply schedule
of Product X 4 400
6 800
8 1100
10 1300
12 1400
THE SUPPLY CURVE
14
12
Price (Rs/Kg)

10
8
6
4
2
0
400 800 1100 1300 1400

Supply (Kgs)
INDIVIDUAL & MARKET SUPPLY
Price Market Supply (Quintals)
(Rs.) A B C D Total
400 4 3 5 6 18
600 8 6 9 10 33
800 11 8 12 15 46
1000 13 10 15 20 58
1200 14 11 20 30 75
INDIVIDUAL & MARKET SUPPLY
CURVE
1400
1200
1000 A
B
800
Price

C
600
D
400 Md
200
0
0 20 40 60 80
Quantity
LIMITATION OF LAW
 Prices of other Products are Constant.

Ex.- Price of Jawar increases; its supply


must increase. But
If Prices of cotton rises further;
farmer's would rather saw cotton than
Jawar. And
Supply of Jawar would fall.
LIMITATION OF LAW
 Cost of Production are Constant.
Even if Prices of product rise,
If rise in the Production cost more
than the gain;
Supply would actually decline.
LIMITATION OF LAW
 State of Technology is Constant.
Technological process would bring
down the cost of production
with such progress, a slight fall in
price may not detain producers to
increase supply.
LIMITATION OF LAW
 Govt.Tax-Policy is Constant
Govt. Lowers Taxes on raw material
or electricity,
Cost of Production may go Down.
Producer may increase production
without reduction in Price.
SUPPLY CURVE AS DIVIDING
LINE

P
(Rs/Kg)
Attainable region S

8
7
Non-Attainable

120 140 160 Q


(Kg)
SUPPLY & DEMAND RELATION
 Equilibrium Price.

P1
 Disequilibrium
Equilibrium pt.
 Excess Supply Q2-Q1
 Excess Demand Q2-Q1
P1

Q1 Q2
INCREASE OF SUPPLY
Price Supply Supply
1 2 700
(Rs)
(Qtl.) (Qtl.) 600

500

200 150 300 400


S1

Price
S2

300 250 400


300

200

400 300 450 100

500 350 500


0 100 200 300 400 500 600
Quantity

600 400 550 •Decrease in cost of Production


EFFECT OF INCREASE OF
SUPPLY
• Whatever the cause, the P
most likely effect will be that S0
the price of the good will
S1
decrease and that more of
the good will be sold. P0
P1
S ↑ => P ↓, Q ↑
D
• an increase of supply gets
buyers to buy more of the Q0 Q1 Q
good by lowering the price.
DECREASE OF SUPPLY
Price Supply Supply
1 2
(Rs) 700

(Qtl.) (Qtl.) 600

500
200 300 150 400 S1

Price
300 S2

300 400 250 200

100
400 450 300 0
0 100 200 300 400 500 600

500 500 350 Quantity

Increase in cost of Production


600 550 400
EFFECT OF DECREASE OF
SUPPLY
• Whatever the cause of the
decrease of supply, the
P S1
most likely effect will be that S0
the price of the good will
increase and that less of the P1
good will be sold. P0

S ↓ => P ↑, Q ↓
• Decrease of supply gets D
buyers to buy less of the
Q1 Q0 Q
good by raising the price.