1. Unit-3
SUPPLY
ANALYSIS

2. Supply
 The Supply of a product refers to the various quantities of the
product, which a seller is willing and able to sell at different
prices in a given period of time.
 To quote Meyers – “We may define supply as a schedule of
the amount of a good that would be offered for sale at all
possible prices at any one instant of time, or during any one
period of time, for example, a day, a week and so on, in
which the conditions of supply remain the same.”
 ”According to Prof. Macconnel– “supply may be defined as a
schedule which shows the various amounts of a product
which a producer is willing to and able to produce and make
available for sale in the market at each specific price in a set
of possible prices during some given period.”
 Thus, Supply indicates how much of a good producers are
willing and able to offer for sale per period at each possible
price, other things constant.
2

3. Supply function:
• A supply function is an algebraic expression of the
functional relationship between supply and its
determinants. Supply is determined by price of the
commodity, price of related commodities, product cost,
number of firms or sellers, state of technology etc
Supply function can be shown as follows:
• S=f[P, Pr, Pc, N, T]
 P= Price of the commodities
 r= Price of related commodities
 Pc= Production cost [ Factors of production ]
 N=Number of firms or sellers
 T= State of technology
Thus supply functions shows the determinants of supply

4. Determinants Of Supply
Apart from price, many factors bring about changes in
supply. Among them the important factors are:
 Cost of production: Variations in cost of production
occurs due to changes in cost of labor, raw materials,
capital, technological advancement s, etc.
 Availability of other products: The supplier can switch
over their production to any of their complementary or
substitute product , if their cost of production is less.
 Climatic changes: natural factors like good climatic
conditions, timely, adequate, well distributed rainfall
results in higher production and expansion in supply.
 Change in techniques of production : An improvement in
techniques of production and use of modern highly
sophisticated machines and equipments will go a long way
in raising the output and expansion in supply.

5. Prices of related goods: If prices of related goods
fall, the seller of a given commodity offer more
units in the market even though, the price of his
product has not gone up. Opposite will be the case
when the price of related goods rises.
Government policy: When the government follows
a positive policy, it encourages production in the
private sector. Consequently, supply expands. For
example granting of subsidies, development
rebates, tax concession, etc,.
Monopoly power: Supply tends to be low, when the
market is controlled by monopolists, or a few sellers
as in the case of oligopoly. Generally supply would
be more under competitive conditions.

6. Supply Schedule
• Supply schedule is a tabular representation of
different quantities of a commodity supplied
at varying prices. It represents the functional
relationship between quantity supplied and
price. It is strictly prepared with reference to
the price of a given commodity.

7. The following imaginary supply schedule shows that as price
rises, supply extends and as price falls , supply contracts. Supply
schedule is never absolute. It varies with different prices and at
different times. 0.75 paisa is the minimum price to be charged per
unit because it equals cost of production. No producer would like
to charge cost price to customers. Hence, supply is zero at this
price. It is called as reserve price.

8. Market supply Schedule
• The total quantity of commodity supplied at
different prices in a market by the whole body
of sellers is called as market supply schedule. It
refers to the aggregate behavior of the market
rather than mere totaling of all individual supply
schedules.
• The market supply schedule helps a firm to
formulate its sales policy by manipulating the
prices. It helps the management to know how
much sales can be increased by raising the price
without losing the demand for the product.

9. Supply Curve: The supply curve is a geometrical
representation of the supply schedule. The upward
sloping
curve clearly indicates that as price rises, quantity
supplied expands and viceversa.
The supply curve is a graph illustrating how much of a
product a firm will supply at different prices.
Price of soybeans per bushel ($)
6
5
4
3
2
1
0
0 10 20 30 40 50
Thousands of bushels of soybeans
produced per year

10. The Law of Supply
• The law of supply is just
the opposite of the law
of demand.
Price of soybeans per bushel ($)
6
5 • The law of supply states
4 that “Other things
3 remaining constant, the
2
quantity supplied varies
1
directly with the price
0
i.e. when the price falls,
0 10 20 30 40 50
supply will contract and
Thousands of bushels of soybeans when price rises, supply
produced per year
will extend”.
• This means that supply
curves typically have a
positive slope.

11. • According to S.E.Thomas, “a rise in price tends to
increase supply and a fall in price tends to reduce it.”
There is a functional relationship between supply and
price.
• Mathematically S= F (P). The law of supply is based on a
number of assumptions.
The other things which should remain constant for the
law to operate are:
1. Number of firms, the scale of production and the speed
of production.
2. Availability of other inputs.
3. Techniques of production.
4. Cost of production.
5. Market prices of other related goods.
6. Climate and weather conditions.

12. Special features of law of supply
1. There is a direct relationship between price and
supply i.e., higher the prices higher will be the supply
and vice versa.
2. Price is an independent variable and supply is a
dependent variable.
3. The applicability of the law is conditioned by the
phrase “Other things being equal”. Thus the law is
not universal in nature.
4. Since the marginal cost of production increases as
output increases, producers must receive a higher
price for the output in order to be able to increase the
quantity supplied
5. The supply curve normally rises from left to right.

13. Exception to the Law of Supply
The Law of Supply does not apply for the following
cases.
• 1. Expectations: In this case of expectations or
speculation, the law of supply does not hold good. If
the seller expects the price to fall further, he may sell
more at the current price which may be low.
• 2. Clearance sale: Sometimes, to clear off the
existing stock a seller may sell his product at a lower
price.
• 3. Depression: During a period of depression, the
law of supply does not apply because of the feeling
of pessimism on the part of the businessman and
lower purchasing power in the hands of the people.

14. • 4. Rare Articles: In the case of rare articles like
old coins, stamps, painting etc., the law of supply
will not hold good because of the supply of
these articles cannot be increased.
• 5. When there is an increase in the price of the
labour the quantity supplied decreases after a
definite level is reached

15. Changes Or Shifts In Supply
• When supply of a product changes only due to a
change in the price of that product alone, it is
called as either expansion or contraction in
supply. Expansion in supply means, more
quantity is supplied at a higher price and
contraction in supply means, less quantity is
supplied at a lower price.
• This tendency can be represented through a
single supply curve. In this case, the seller will be
moving either in the upward or downward
direction along with the same supply curve.
• It is clear from the following diagram

16. • In the diagram, we can notice that when price is Rs. 2.00, 20 units
are sold and when the price rises to Rs. 4.00, 40 units are sold
(extension). On the other hand, when price falls from Rs. 4.00 to Rs.
2.00 quantity supplied also falls from 40 to 20 units. Supply of a
product may change due to changes in other factors. If supply
changes not because of changes in price, but because of changes in
other determinants, then, it will be a case of either increase or
decrease in supply.

17. Increase in Supply: It implies more supply at the same price
or same quantity of supply at a lower price. In this case, we have
to draw a new supply curve.
In the diagram, Original price = Rs 6.00
Original supply = 10 units Original supply Curve = SS

18. • Now the seller sells 20 units at the same price of Rs. 6=00.Hence,
we get a new point P’. or same quantity of 10 units are sold at a
lower price of Rs. 4=00. Hence, we get another new point P”. If
we join these two new points P’&P” we get a new supply curve
S’S’. There is forward shift in the position of supply curve.
Forward shift indicates increase in supply.
• Decrease in supply
• It implies that less quantity is supplied at the same price or
same quantity is supplied at a higher price. In this case also, we
have to draw a new supply curve.
• In the diagram,
• Original price = Rs.4=00
• Original supply = 20 units
• Original supply Curve = SS

19. When less quantity of 10 units are supplied at the same price of
Rs.4.00, we get a new point P. Similarly, when same quantity of 20
units is supplied at a higher price of Rs.6 00, we get a new point P”. If
we join these new points P’ & P” then we get a new supply curve
S’S’, which is located to the left of the original supply curve. There is
backward shift in the position of supply curve shift in the curve.
Backward indicates decrease in supply.

20. Elasticity of Supply
Elasticity of Supply measures the degree of
responsiveness or sensitiveness of supply to change in the
price of a commodity. Supply changes due to a change in
price of a commodity. The extent of change in supply in
accordance with the change in price is called Elasticity of
supply.
When a small fall in the price of a commodity leads to a
large contraction in supply, supply is comparatively elastic.
But when a big fall in price leads to a very small
contraction in supply, said to be comparatively inelastic.
Conversely, a small rise in price leading to a big extension
to supply shows elastic supply and a big rise in price
leading to a small extension in supply indicates inelastic
supply.

21. • The concept of elasticity of supply is a relative
measure of the responsiveness of quantity
supplied of a commodity to a change in its
price. The greater the responsiveness of
quantity supplied to the change in its price, the
greater its elasticity of supply. Elasticity of
supply may be defined as a percentage change
in the quantity supplied of a product divided by
the percentage change in price that caused the
change in quantity supplied.

22. % Change in the quantity supplied of a product
Es = _______________________________
% change in its price
δQ/Q δQ P
= ______ = ___ x __
δP/P δP Q
Es= Elasticity of supply of a product
Q= Original quantity supplied of the product
δQ = Change in the quantity supplied
P = Original price of the product
δP = Change in the price
• For example, if the price of a refrigerator rises from
20,000 to 21,000 per unit and in response to this rise
in price, quantity of it increases from 25,000 units to
30,000 units, the elasticity of supply will be………..

23. Types of elasticity of supply
• 1.Perfectly elastic supply: Supply is said to be
perfectly elastic when a slight change in price
leads to immeasurable changes in supply. Hence
supply curve would be a horizontal or parallel
line to OX axis.

24. • 2. Perfectly inelastic supply: When supply of a
commodity remains constant and does not
change whatever may be the change in price, it is
said to be absolutely or perfectly inelastic supply.
Here the supply curve tends to be a vertical
straight line. ES = 00 (zero) .

25. • 3. Relatively Elastic supply: If change in the
supply is more than proportionate to the
change in price, elasticity of supply is greater
than one. In that case, the supply curve is
flatter and is more inclined to x axis.

26. • 4. Relatively Inelastic supply: If the change in
supply is less than proportionate to a given
change in price, then, elasticity of supply is
said to be less than one. Here the supply is a
steeply rising one.

27. • 5. Unitary elastic supply: If proportionate
change in supply is exactly equal and
proportionate to the change in price, then
elasticity of supply is equal to one.

28. Factors Determining Elasticity Of Supply
• 1. Time period :Time has a greater influence on elasticity of supply
than on demand. Generally supply tends to be inelastic in the
short run because time available to organize and adjust supply to
demand is insufficient. Supply would be more elastic in the long
run.
• 2. Availability and mobility of factors of production: When factors
of production are available in plenty and freely mobile from one
occupation to another, supply tends to be elastic and vice versa.
• 3. Technological improvements : Modern methods of production
expands output and hence supply tends to be elastic. Old methods
reduce output and supply tends to be inelastic.
• 4. Cost of production :If cost of production rise rapidly as output
expands, then there will not be much incentive to increase output
as the extra benefit will be choked off by increase in cost. Hence
supply tends to be inelastic and vice versa.

29. • 5. Kinds and nature of markets : If the seller is
selling his product in different markets, supply tends
to be elastic in any one of the market because, a fall
in the price in one market will induce him to sell in
another market. Again, if he is producing several
types of goods and can switch over easily from one
to another, then each of his products will be elastic
in supply.
• 6. Political conditions : Political conditions may
disrupt production of a product. In that case, supply
tends to become inelastic.
• 7. Behavior pattern of the producers
• 8. Prices of related goods: A firm can charge a
higher price for its products, if prices of other
products are higher and vice versa.