Economics: Supply: Law and Shape of Supply, Market Supply of Commodity

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Law of Supply

  • Let us try to know the effect of change in any one factor on the quantity supplied. To know this, we must keep all other factors unchanged or constant. To begin with, out of the six factors, let us only consider the effect of change in price of the commodity on its quantity supplied. To know this, we must assume that all other factors such as price of other related goods, price of inputs, technology of production and government policy etc. remain constant or do not change at this time. The relationship between price and quantity supplied, when all factors other than price of the commodity remain constant, is given by the law of supply.

  • All other factors determining supply remaining constant, the price of a commodity and its quantity supplied are directly related.

Shape of the Supply Curve

According to the law of supply when other factors determining supply remain constant, a firm offers more quantity of a commodity for sale at a higher price and less of it at a lower price. Due to this direct relationship of price and quantity supplied of the commodity, the supply curve is upward sloping. The following factors are responsible for upward slope of the supply curve:

  • A rise in price of the commodity causes rise in profits, as a result firms are induced to supply more quantity of the commodity to increase profit.

  • A rise in price of the commodity induces the seller to dispose of at least a part of his stock. The reverse happens when there is a fall in price of the commodity.

  • An increase in the price of the commodity causing higher profit attracts the new firms to enter the market and this adds to the supply of the commodity leading to more quantity supplied at a higher price.

Market Supply of Commodity

  • ‘X’ Ltd is not the only firm in the market supplying the sugar. There may be other firms also supplying sugar in the market. In order to know the total quantity of sugar supplied by all the firms taken together in the market we have to simply add the individual quantities at the prevailing price and time. The resultant quantity will be called the market supply of sugar.

  • Hence the total quantity of a commodity supplied by all the firms in the market at a given price at a given time is called the market supply of that commodity.

Market Supply Schedule of a Commodity

  • The market supply schedule of a commodity is the sum of the quantities of the commodity supplied by all the firms in the market at different prices. All other firms/sellers in the market will increase or decrease their quantities of commodity based on the price of the commodity in the market, respectively.

  • Continue with the example of supply of sugar. Study the market supply schedule of sugar as given in table below:

Market supply of sugar

Market Supply of Sugar
Market supply of sugar

Price

(Rs per quintal)

Quantity supplied of sugar

per day (in quintals)

Market supply of sugar (in quintal)

2800

Firm X

Firm Y

Firm Z

33

8

10

15

2900

9

11

16

36

3000

10

12

17

39

3100

12

14

20

46

3200

15

17

25

57

You can see in table that when price of sugar is Rs 2800 per quintal, firm X supplies 8 quintals, firm Y supplies 10 quintals and firm Z supplies 15 quintals of sugar per day. Therefore, market supply of sugar at a price of Rs. 2800 per quintal is 8 + 10 + 15 = 33 quintals per day. When the price changed to Rs.2900, the supply of X, Y and Z was 9, 11 and 16 quintals respectively which comes to 36 quintals. So, at price Rs.2900 the market supply of sugar was 36 quintals. Similarly, you can see the individual and the market supply of sugar at prices Rs.3000, 3100 and 3200 respectively in the table.

Factors Determining Market Supply

The market supply of a commodity is influenced by following two factors:

Number of Sellers/Firms

Market supply is an aggregate of all individual supply schedules in the market. It is clear that if the number of firms increases, market supply will also increase. On the other hand, if number of firms decreases, the market supply will also decrease.

Expected Future Price

If the price of a commodity is expected to rise in the near future, the firm will supply less quantity of the commodity at present in expectation of higher profit due to rise in price in future and vice. Versa.

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