Theory of Supply: Characteristics and Determinants of Individual and Market Supply
What is Supply?
The amount of a commodity a company is willing and able to provide for sale at a specific time is called the supply. The four factors highlighted by the definition of supply are quantity of commodity, price of the commodity, period, and willingness to sell.
Characteristics of Supply
The characteristics of Supply are:
1. Supply is a desired quantity: It doesn’t show how much the company sells; rather, it just shows the willingness, or how much the firm is willing to sell.
2. Supply of a commodity does not comprise the entire stock of the commodity: It shows the quantity that a company is prepared to sell in the market for a specific price. For example, Panasonic’s market supply of TV sets does not represent the complete available stock of TV sets. It is the quantity that Panasonic is prepared to sell in the market.
3. Supply is always expressed in terms of a price: Supply for a commodity is always expressed in terms of price. It is because, if the price of commodity changes, the amount supplied may as well change.
4. Supply is always considered in terms of a period: Supply is the quantity that a business is willing to provide over a certain period (a day, a week, a month, or a year). As a result, supply is classified as a ‘Flow Variable’.
Similar to demand, supply might be for one seller (Individual Supply) or all sellers (Market Supply).
- Individual Supply is the amount of a commodity that a certain company is willing and able to sell at a specific price during a specific period.
- Market Supply is the amount of a good that all businesses are willing and ready to offer for sale at a specific price during a specific period.
Supply and Stock
The words supply and stock of the commodity are frequently used interchangeably. However, the two concepts are different in economics.
Stock describes the total amount of a specific commodity that is on hand with the company at any given time. On the other hand, supply refers to the portion of the stock that a producer is willing to provide for sale. Stock can never be less than supply. For instance, if a vendor has 90 tonnes of rice in his godown and is willing to sell 50 tonnes of it for ₹50 per kilogram, the supply is 50 tonnes, while the stock is 90 tonnes.
Determinants of Supply (Individual Supply)
There are several significant factors influencing a commodity’s supply. The commodity’s supply will change if any one of these variables changes. Some of the essential factors affecting individual supply are as follows:
1. Price of the given Commodity:
The price of a commodity is the main factor affecting its supply. A commodity’s price and supply are typically directly correlated with one another. It indicates that as the price of a specific commodity rises, the quantity supplied also increases and vice versa. It occurs because there are greater chances of making a profit at higher prices. It encourages the company to increase the number of goods it sells in the market.
2. Price of other Goods:
Resources have multiple uses, and thus in addition to a commodity’s price, other commodities’ prices also influence how much of a resource is supplied. Other goods become more profitable in comparison to the given commodity when their prices rise. As a result, the company switches from producing the given commodity to producing other goods with its limited resources. For instance, a farmer may decide to grow wheat on his field instead of the given crop (say rice) if the price of wheat goes up.
3. Price of the Factors of Production or Inputs:
The cost of producing a commodity is determined by the prices of the inputs or elements of production utilised in the manufacturing process. The cost of production rises if the prices of any or all of these components or inputs rise. As a result, profitability declines, because of which the seller decreases the commodity’s supply. On the other hand, a rise in the profit margin based on a decrease in the price of manufacturing inputs or factors increases supply. For instance, baking a biscuit needs various inputs like flour, sugar, labour, machines, etc. If the price of one of more inputs rises, then baking biscuits will become less profitable, and the firm will supply less biscuits.
4. State of Technology:
The supply of a commodity is influenced by technological advancements. Advanced and proven technology lowers production costs, enhancing profit margins. It encourages the seller to increase the supply. However, due to technological degradation or complex and outdated technology, the cost of production of a firm increases resulting in a decline in supply.
5. Government Policies (Tax and Concessions):
When the government increases taxes, it increases the cost of production of the firms, resulting in a decline in supply due to lower profit margins. However, when the government provides tax deductions and subsidies, it increases the supply as it becomes more profitable for the firms to supply their goods.
6. Objectives of the Firm:
In general, the supply of a commodity increases only at higher prices since it achieves the profit maximisation objective of the firms. However, because of the changing trend, some businesses are willing to supply more even at rates that do not maximise their profits. Such businesses want to expand their reach into new markets and improve their image.
Determinants of Market Supply
All the variables affecting individual supply have an impact on market supply. Additionally, the following factors have an impact on the market supply:
1. Number of Firms in the Market:
Due to the vast number of producers who create the same commodity, market supply increases as the number of businesses in the industry increases. However, if some businesses start leaving the industry because of losses, the supply in the market decreases.
2. Future Expectations regarding Price:
Sellers will reduce their current market supply to increase it later at higher prices if they expect a rise in price in the near future. On the other hand, sellers will increase the current supply if they expect a decline in prices to prevent future losses.
3. Transportation and Communication Means:
Improved transportation, communication systems, and other appropriate infrastructure developments help in maintaining a sufficient supply of goods or services.
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