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SUPPLY FUNCTION In economics, supply during a given period of time means the

quantities of goods which are offered for sale at particularprices.

Hence, the supply of a commodity is defined as the amountof that commodity which a seller (or producer) are able andwilling to offer for sale at a particular price during a certainperiod of time.

Supply is a relative term. It always referred to in relation to time and price. A statement of supply without reference to price and time

conveys nothing in economics. For instance, a statement such as the supply of milk is 500

liter is a meaningless in economics. In economics, one must say, the supply at such and such

price and during a specific period. Hence the above statement becomes meaningful if it is said

at a price of 20 per liter, a dairy farms daily supply of milk is

500 liters.

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Secondly, supply is what the seller is able andwilling to offer for sale.

The ability of a seller to supply a commodity,however, depends on the stock available with him.Thus stock is the major determinant of supply of acommodity.

Determinants of Supply:The supply of the commodity depends not

only on the price of the commodity but also onseveral other factors collectively called the

conditions of supply.

These conditions are as follows:

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1. Price of the Commodity: Since higher moneyincome is necessary to induce producers toproduce more, the amount supplied thereforeincreases when producers get higher price for theproduct.

2. Price of Other Goods: Change in the price ofother goods in the market also has influence onthe supply of the commodity. For Example: if theprice of good Y rises, the producer of good X will

start considering switching his production to goodY as it has become relatively more attractive toproduce Y now then before.

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3.Prices of Factors of Production: the cost ofproduction of a commodity depends upon the pricesof different factors of production. When prices of oneof the factors are increases, the production costwould be higher and the price of the particularproduct will be higher as well and vice-versa. This

will lead to changes in the profitability of the differentcommodities and their amount supplied.

4. Producers Objective: the producers may havemany objectives like profit maximization, sales

revenue maximization, goodwill etc. Amountsupplied of a commodity is often influenced by theproducers objective. A goodwill maximiser will sellmore commodities than the profit maximiser.

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5. Factors Outside Economic Sphere: weatherconditions, floods and droughts, epidemics etc docause fluctuations in the supply of goods,particularly of agricultural goods. Fire, war andearthquakes may destroy productive assets of acommodity and curtail future supply.

6. Tax and Subsidy: A higher tax on commodity orfactors of production rise its cost of production andconsequently production and supply become less. A

subsidy on the other hand, provides incentive toproduction and augments supplies.

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Supply Function: Mathematically, the supply function explains the relationship

between the quantity supplied for a commodity and itsdeterminants.

In supply function, the determinants of supply can be summarizedas under:

SX = f (PX, PF, P1Pn, O, T, t, s, u)

Where: Sx refers to the quantity supplied of product x.

Px refers to the price of product xPF refers to the set of prices of the factor inputs employed for

producing XP1..Pn refers to the price of all other related products in an

economy.

O refers to factors outside the economic sphereT refers to the technology usedt refers to taxs refers to the subsidies

u refers to all other determinants which are not covered in the

above mentioned determinants.

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Law of Supply:

The law of supply reflects the general tendency of thesellers in offering their stock of a commodity for sale in

relation to the varying prices. It describes sellers supply behaviour under given

conditions.

It has been observed that usually sellers are willing to

supply more with arise in price.Statement of the Law:

CETERIS PARIBUS, the supply of a commodity expand(i.e. rises) with rise in prices and contracts (i.e. Falls)

with fall in its prices. The law thus suggests that the supply varies directly

with change in its price. So, a larger amount is suppliedat higher price than at lower price at market.

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Explanation of the Law:

Supply Schedule

Price of ball pen (Rs.) Quantity Supplied (in000 per Unit)

11

12

13

14

10

13

20

25

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Diagrammatic Representation:

Y

X

S

S

Prices (Rs.)

Quantity Supplied

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Demand Supply Equilibrium (MarketEquilibrium):

When supply and demand are equal (i.e. when thesupply function and demand function intersect) theeconomy is said to be at equilibrium.

At this point, the allocation of goods is at its most

efficient because the amount of goods beingsupplied is exactly the same as the amount ofgoods being demanded.

Thus, everyone (individuals, firms, or countries) is

satisfied with the current economic condition. At thegiven price, suppliers are selling all the goods thatthey have produced and consumers are getting allthe goods that they are demanding.

http://www.investopedia.com/terms/e/equilibrium.asphttp://www.investopedia.com/terms/e/equilibrium.asp

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As you can see on the chart, equilibrium occursat the intersection of the demand and supply

curve, which indicates no allocative inefficiency.At this point, the price of the goods will be P* andthe quantity will be Q*. These figures are referredto as equilibrium price and quantity.

In the real market place equilibrium can onlyever be reached in theory, so the prices of goodsand services are constantly changing in relation

to fluctuations in demand and supply.Disequilibrium occurs whenever the price or

quantity is not equal to P* or Q*.

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1. Excess SupplyIf the price is set too high, excess supply will

be created within the economy and there willbe allocative inefficiency.

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At price P1 the quantity of goods that theproducers wish to supply is indicated by Q2.At P

1

, however, the quantity that theconsumers want to consume is at Q1, aquantity much less than Q2.

Because Q2 is greater than Q1, too much is

being produced and too little is beingconsumed. The suppliers are trying toproduce more goods, which they hope tosell to increase profits, but those consumingthe goods will find the product less attractiveand purchase less because the price is toohigh.

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2. Excess DemandExcess demand is created when price is set belowthe equilibrium price. Because the price is so low,too many consumers want the goodwhile producers are not making enough of it.

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In this situation, at price P1, the quantity ofgoods demanded by consumers at this priceis Q2. Conversely, the quantity of goods thatproducers are willing to produce at this priceis Q1.

Thus, there are too few goods being

produced to satisfy the wants (demand) ofthe consumers. However, as consumershave to compete with one other to buy thegood at this price, the demand will push theprice up, making suppliers want to supplymore and bringing the price closer to itsequilibrium.