What do you understand by Individual Supply, Market Supply,Meaning of Supply, factors affecting individual supply, Law of supply with curve (Economics notes)

 Individual Supply

Individual supply describes the willingness of an individual firm to provide a specific quantity of a good or service to the market over a given period of time. It depends on a number of different factors, such as the price of the product, cost of production, government policies and regulations, etc. (for more information see also factors that cause a shift in the supply curve). In most cases (i.e. for normal goods) supply increases as the price of a good or service rises. This relationship between price and quantity can be illustrated with a supply curve (see also how to draw a supply curve).

For example, let’s analyze the two diagrams below. They illustrate the supply of ice cream from two individual firms – Super Ice and Frozen Happiness. Super Ice’s supply curve (S_SI) and Frozen Happiness’ supply curve (S_FH) show us how much ice cream each of the two companies is willing to sell at different prices.

Note that the two curves have different slopes. While Super Ice will start selling ice cream as soon as the price is higher than USD 1.00, Frozen Happiness will only enter the market at a price higher than USD 2.00. However, at a price of USD 4.00, both companies are willing to sell 4 units of ice cream. To find out why the slopes are different, we would need to analyze a number of additional factors, including the firm’s production possibility frontiers. (Exam studies 

Market Supply

Market supply describes the quantity of a specific good or service that all sellers in a market combined are willing to sell. In other words, it represents the sum of all individual supplies for a particular good or service. Again, this is much easier to understand once we look at the corresponding demand curve.

Let’s revisit our example from above. To calculate market supply, all we need to do is horizontally sum the individual supply curves of our two sellers (i.e. Super Ice and Frozen Happiness). This results in the following market supply curve (S_M):

Note that this curve has a sharp bend at a price of USD 2.00. The reason for this is that Frozen Happiness will not sell any ice cream below that price. That means below USD 2.00 (and above USD 1.00) market supply is equal to Super Ice’s individual supply because in this range it is the only supplier in the market. For all prices above USD 2.00 market supply is equal to Super Ice’s supply plus Frozen Happiness’ supply. For instance, at a price of USD 4.00 market supply is 8 units of ice cream (4 supplied by Super Ice and 4 by Frozen Happiness).

 

MEANING OF SUPPLY

 We should not confuse between “availability of a commodity in the market” and “supply of that commodity. They are not the same. Even if a commodity is available, it does not mean that it has been supplied. The definition of supply is given as follows: Supply of a commodity is the quantity of the commodity that a seller offers for sale at a given price at a given time.

The definition of supply includes the following three things:

 1. The quantity of a commodity offered for sale by a seller.

 2. The price of the commodity given in the market at which the seller is willing to sell that quantity of the commodity.

3. The time period during which the seller is willing to sell that quantity of the commodity.

 

Examples of Supply

·       Ganga Singh sold 120 liters of milk at a price of Rs.25 per liter last week from his dairy farm.

·       The fruit seller sold 600 Kg of apples during the past 15 days at Rs. 50 per Kg of apple.

·       A firm called ‘X’ Ltd. sold 8 quintals of sugar at a price of Rs.2800 per quintal in one day.

·       The grain merchant sold 300 quintals of rice at Rs.2300 per quintal in the month of August.

 

FACTORS AFFECTING INDIVIDUAL SUPPLY

What factors influence the individual supply of a commodity? The most important factors are the following: Price of the commodity Technology of production Price of inputs Price of other related goods Objective of the firm Government policy

      i.          Price of the commodity: The price of the commodity is an important determinant of the supply of a commodity. When a producer produces a commodity he incurs a lot of expenditure on factors of production and raw materials etc. which we call cost of production. He can recover these costs by selling the product at a certain price in the market. Since price is also the average revenue, the higher the price higher will be the average revenue, and accordingly, the higher will be total revenue. So price is a very important determinant of supply.

    ii.          Technology of production: An improvement in technology of production reduces the cost of production per unit of the commodity which increases the margin of profit of the firm. This induces the firm to supply more of the commodity with the use of improved technology On the other hand if a firm uses old and inferior technology; it increases the cost of production per unit of the commodity and reduces the margin of profit which leads to decrease in the supply of the commodity.

  iii.          Price of inputs: Suppose a firm is producing ice cream. If the price of milk falls, the cost of production per unit of ice creams will fall. It will lead to an increase in the margin of profit per unit. So, the firm will increase the supply of ice cream. On the other hand, if the price of milk increases, the cost of production per unit of ice cream will increase. It will lead to a decrease in the margin of profit and the firm will decrease the supply of ice cream. Thus, if the price of any input used in the production of a commodity falls, it leads to a decrease in the cost of the production per unit and as a result supply of the commodity will increase. On the other hand, an increase in the price of any input used in the production of a commodity increases the cost of production per unit and decreases the supply of the commodity.

  iv.          Price of other related goods: The supply of a commodity is also influenced by the price of other related goods. Let us suppose that a farmer produces two goods wheat and rice with the help of given resources. If the price of rice increases, it will be more profitable for the farmer to produce more rice. The farmer will divert his resources from the production of wheat to the production of rice. As a result, the supply of rice will increase and that of wheat will decrease. On the other hand, a fall in the price of rice will result in a decrease in the supply of rice and an increase in the supply of wheat.

    v.           Objective of the firm: Different firms have different objectives. Some firms have an objective to maximize their profits whereas some may have an objective of maximizing sales. Some other firms may have an objective to increase their goodwill/prestige and some may have an objective of increasing employment opportunities. A firm having an objective of increasing sales may supply more of a commodity even at a lower price. Thus the supply of a commodity is influenced by the priority given to the objective by the firm and the readiness to sacrifice one for the other.

  vi.           Government policy: Government policy also influences the supply of a commodity. For example, if the government increases the rate of value added tax or sales tax on a commodity, it will increase the cost of production per unit which will decrease the supply of the commodity. On the other hand, a reduction in the tax on a commodity will decrease the cost of production per unit and increase the supply of the commodity.

 

LAW OF SUPPLY

Just now we said that the six major factors determining the supply of a commodity are – the price of the commodity, price of other related goods, price of inputs, the technology of production, the objective of the firm, and government policy. A change in any one or all of these factors may lead to a change in the quantity supplied of the commodity. Suppose we want to know the manner in which the quantity supplied of commodity changes due to a change in one of the factors.

 

SUPPLY CURVE

The information given in table 10.2 can also be represented diagrammatically. The diagrammatic representation of the law of supply is called the supply curve. Thus, the supply curve shows different quantities of a commodity supplied at different prices per unit of time in diagrammatic form.

We can construct an individual supply curve with the help of the information given in table 10.2. The supply curve is drawn in Fig. 10.1

Take the quantity supplied of mangoes on the X-axis and the price of mangoes on the Y-axis. On the Y-axis (vertical) the prices starting from Rs 20 to 60 are plotted. On the X-axis (horizontal ) the quantities of mangoes starting from 100 to 500 kg are plotted. Mohan has supplied 100 kg of mangoes at Rs 20. This combination is shown at point A in the graph given in Fig. 10.1. Similarly, the other combinations of price and quantity of mangoes as given in table 10.2 are shown as points B, C, D, E and F. By joining these points Mohan’s supply curve for mangoes has been derived.

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