Chapter 4: Supply Analysis

What is Supply?

The total amount of a specific good or service that is available to sell.

What is Total Output?

The total quantity of the commodity produced.

What is stock?

Stock is the total output produced and it is essentially potential supply. If stock is increased then the supply available can be increased as well.

Determinants of Supply (8M)

1. Price of Commodity: There is a direct relation between price and quantity supplied. Greater the price the greater the quantity of goods sold.

2. State of technology: Technological improvements reduce production cost and hence increase supply.

3. Production Cost; Increase in production cost leads to decrease in production and supply.

4. Infrastructural Facility: Shortage in transport, communication, power, etc, leads to less production and supply.

5. Government Policy: Measures taken may affect production positively or negatively.

6. Natural Conditions: Agricultural supply depends on weather conditions. Hence, it is directly related.

7. Future Prices: If prices are expected to rise then production and supply increases and vice versa.

8. Other Factors: Nature of market, exports and imports, etc.

What is the Law of Supply?

Acccording to Prof. Alfred marshall and his book ‘Principle of Economics’ in 1980, the law states that “Other things being constant, higer the price of the commodity, more is the quantity supllied and lower the price of a commodity less is the quantity supplied.”

Formula for Supply

Sx = f(Px)

(S) = Supply

(x) = Commodity

(f) = Function

(P) = Price of Commodity

Assumptions of the Law of Supply

Exceptions to the Law of Supply (8M)

1. Supply of Labour: Labour supply is the total number of hours that workers work to earn a given wage rate. If the wage rate is increased workers will work for only a certain hours more. If the wages are increased again, workers will choose to have leisure and thus cause a backward bending supply curve.

2. Agricultural Goods: Crops depend on the weather and if weather conditions are bad, no increase of price can increase supply.

3. Perishable Goods: Fruits, milk, etc. may be sold in bulk at lower prices to avoid loss.

4. Urgent need for Cash: If the seller needs hard cash, products can be sold below market price.

5. Rare Goods: Even increase in price cannot increase supply. ex- antiques.

What is Variation in Supply? Also state the 2 types.

When quantity supplied of a commodities varies due to a change in it price, (the other factors remaining constant)

1. Expansion: Increase of Supply due to increase in price

2. Contraction: Decrease in Supply due to fall in price.

3. 
   

What are Changes in Supply? State the 2 types.

When all factors including price remains constant and the supply changes.

1. Increase: Due to technological improvements, cheaper production inputs, etc. Supply increase.

2. Decrease: Due to unfavourable changes in other factors such as increase in price of inputs, increase in tax rates, outdated technology, etc. will shift the supply curve to the left, indicating a decrease in market supply.

Concepts of Cost

1. Total Cost (TC)

2. Average Cost (AC)

3. Marginal Cost (MC)

Concepts of Revenue.

The receipts obtained by a firm from the sales of a certain quantities of a commodity at a given price.

1) Total Revenue (TR)

2) Average Revenue (AR)

3) Marginal Reenue (MR)

Explain Total Cost

TOtal expenditure spent by a firm on the factors of production for goods and services.

TC= TFC + TVC

Total Fixed Cost (TFC) is the cost on fixed factors such as land, machinery, etc.

Total Variable Cost (TVC) is the expenses on variable factors such as raw material, labour, etc.

Explain Total Revenue

The total sale proceeds of a firm by selling a commodity at a given price.

TR = Price x Quantity