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The supply of a product means " the amount of that product which producers are able and willing to offer for sale at a given price". Supply depends on the price when there is a change in price the demand for the product by the consumer or the supply of the product by manufacturers to the market change. When the price is high, demand is less but the supply is high.
Determinants of supply:
The market supply of goods generally depends on many factors such as
1. Input prices
2. Technology
3. Government regulation
4. Competition
5. Substitute in production
6. Taxes
7. Producer expectation
1. Input prices:
The supply curve explains how much manufactures are willing to produce at different prices. But as the production cost changes the willingness of producers to produce output at a give price changes. When the price of an input rises producers are willing to produce less at given price.
2. Technological change:
Improvement in technology many a time leads to increase in production at a lesser cost. This has an increasing effect on the supply at the same price. Natural disasters that destroy existing technology have an adverse effect on business and shift the supply curve to the left.
3. Government regulations:
Some regulation such as pollution control, emission control, regulation on raw materials tend to hinder supply independent of the price of the product in the market. When the government policies support the Industry like small scale industries and village industries then paying no attention of the price the input increases.
4. Number of firms or competition:
Increase in the number of firms in an industry affects the position of the supply curve. When more firms an industry more and more products become available in the market at a given price. This is reflected by the rightward shift of the supply curve. Similarly the number of firms reduced then the supply will also reduce then the supply shift to left.
5. Taxes:
An excise tax is a tax on each units of output sold, tax is collected from the supplier then the supplier is receiving an additional amount from the customer. This shifts the supply curve up. The excise tax has the effect of decreasing the supply of a product.
6. Substitutes in production:
Many firms have technologies that are readily adoptable to several different products. For eg. An automobile manufacturer can convert a truck assembly plant into car assembly plant by altering it's Production facilities. This effect will shift the supply curve to the left.
7. Producers expectation:
Selling an Unit of output today and selling an Unit of output tomorrow are substitutes in production. If a firm expects the prices to be higher in the future and the product is not perishable producers can hold back outputs today and sell it later at higher price. This has the effect of shifting the supply curve to the left.
ELASTICITY OF SUPPLY:
Elasticity of supply can be defined as " the degree of responsiveness of supply to a given change in price". The formula for calculating elasticity of supply
es= proportional change in the quantity supplied / proportional change in price.
es= ((Q2-Q1)/Q1) / ((P2-P1)/P1)
Q1 is the quantity supply before price change
Q2 is the quantity supply after price change
P1 is the original price
P2 is the new price
Types of supply elasticity:
1. Perfectly elastic supply
2. Perfectly inelastic supply
3. Unitary elastic supply
4. Relatively elastic supply
5. Relatively inelastic supply
1. Perfectly elastic supply:
Perfectly elastic supply is one in which the supply is present only at one price. Any decrease in the price amounts to nothing being supply in the market.
2. Perfectly inelastic supply:
It is one in which the quantity supplied does not change as price changes. This would happen if the supplier persists in producing a given quantity 'd' and dumps it on the market for whatever price it would fetch.
3. Unitary elastic supply:
When the quantity of a product supplied to the market changes in the same proportion as the change in price the product is said to have unitary elastic supply. Unitary elastic supply is a straight line passing through the origin.
4. Relatively elastic supply:
Here the supply starts only after a certain price 'p'. Below this price there is no supply and above this price the supply changes in the same proportion as the change in price.
5. Relatively inelastic supply:
Relatively inelastic supply is one in which manufacturer supply their products even at a very low price. But once the price increases the supply also increases.
Cross elasticity of supply:
The cross elasticity of supply measures the change in quantity supplied of one commodity when the price of another commodity changes. This was introduced by A. Powell, L.ward and F.Gruen. The formula is
esc= proportionate (%) change in quantity supplied / proportionate (%) change in price.
SUPPLY FUNCTION:
Supply function of a firm or a group of firms relates the quantity of a commodity that the seller is willing and able to supply to the factors that determine that supply. The important one are
1. Product price (px)
2. Factor productiveness (FE)
3. Factor price (FP)
4. Prices of another Products related in production (PR)
5. Firm's goals (G)
6. Weather, strikes and other short run forces(W)
7. Firm's expectations about future prospects for price, costs,sales and the state of the economy in general (E)
8. Number (N) and character of the firm(C) in the industry.
Putting all these factors together the supply function can be written as
Sx= f(PX,FE,FP,PR,G,W,E,N,C).
Supply of goods varies directly with it's own price other things remaining the same. This is called Law of supply.
Increase in factors of production brings an increase in supply.
Increase in factors price leads to increase in production cost which in turn induces the firm to restrict supply.
Short-term factors such as weather, strikes, lockouts have short term impact on supply of goods and services.
The number of sellers obviously has a positive impact on the aggregate supply of a good in the market. The character of sellers in terms of their strategies of competition in the market also has a bearing on aggregate supply. If sellers act like rivals that would enter into cut throat competition and supply more of their products.