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Meanings of Supply and Stock:
Definition
of Supply:
Supply is of the scarce goods. It is the
amount of a commodity that sellers are able and willing to offer fore sale at
different price per unit of time.
In the words
of Meyer:
“Supply is a schedule of the amount of a
good that would be offered fore sale at all possible price at any period of
time; e.g., a day, a week, and so on”.
Definition
of Stock:
"Stock is meant the total quantity of a
commodity this exists in a market and can be offered for sale at a short
notice".
Difference/Distinction
Between Supply and Stock:
Here it seems
necessary that the meaning of the term ‘supply’ and ‘stock’
may be made clear as they are often confused by the readers. Supply refers to that quantity of the
commodity which is actually brought into the market fore sale at a given
price per unit of time. While Stock is meant the total quantity of a
commodity this exists in a market and can be offered for sale at a short
notice.
The supply
and stock of a commodity in the market may or may not be equal if the
commodity is perishable, like vegetables, fruits, fish, etc; then the supply
and stock is generally the same. But in case of a product find that the price
of his product is low as compared to its cost of production, he tries to
withhold the entire or a part of a stock. In case of a favorable price, the
producer may dispose of large quantities or the entire stock of his
commodity; it will all depend upon his own valuation of the commodity at that
particular time.
Law of Supply:
Definition of Law of Supply:
There is direct relationship between the price of a commodity
and its quantity offered fore sale over a specified period of time. When the
price of a goods rises, other things remaining the same, its quantity which
is offered for sale increases as and price falls, the amount available for
sale decreases. This relationship between price and the quantities which
suppliers are prepared to offer for sale is called the law of supply.
Explanation of Law of Supply:
The law of
supply, in short, states that ceteris paribus sellers supply more goods
at a higher price than they are willing at a lower price.
Supply Function:
The supply
function is now
explained with the help of a schedule and a curve.
Market Supply Schedule:
Market Supply Schedule of a Commodity:
(In Dollars)
In the table above, the produce are able and willing to offer
for sale 100 units of a commodity at price of $4. As the price falls, the
quantity offered for sale decreases. At price of $1, the quantity offered for
sale is only 40 units.
Formula for Law of Supply/Supply Function:
The supply
function can also be expressed in symbols.
QxS = Φ (Px Tech, Si, Fn,
X,........)
Here:
Qxs =
Quantity supplied of commodity x by the producers
Φ = Function of
Px =
Price of commodity x.
Tech = Technology.
S = Supplies of inputs.
F = Features of nature.
X = Taxes/Subsidies.
= Bar on the top of last
four non-price factors indicates that these variables also affect the supply
but they are held constant.
Example of Law of Supply:
The law of supply is based on a moving quantity of materials
available to meet a particular need. Supply is the source of economic
activity. Supply, or the lack of it, also dictates prices. Cost of scarce
supply goods increase in relation to the shortages. Supply can be used to
measure demand. Over supply results in lack of customers. An over supply is
often a loss, for that reason. Under supply generates a demand in the form of
orders, or secondary sales at higher prices.
If ten people want to buy a pen, and there's only one pen, the
sale will be based on the level of demand for the pen. The supply function
requires more pens, which generates more production to meet demand.
Assumptions of Law of Supply:
(i) Nature of Goods. If the goods are perishable in nature and the seller cannot wait
for the rise in price. Seller may have to offer all of his goods at current
market price because he may not take risk of getting his commodity perished.
(ii) Government Policies. Government may enforce the firms and producers to offer
production at prevailing market price. In such a situation producer may not
be able to wait for the rise in price.
(iii) Alternative Products. If a number of alternative products are available in the market
and customers tend to buy those products to fulfill their needs, the producer
will have to shift to transform his resources to the production of those
products.
(iv) Squeeze in Profit. Production costs like raw materials, labor costs, overhead costs
and selling and administration may increase along with the increase in price.
Such situations may not allow producer to offer his products at a particular
increased price.
Limitations/Exceptions of Law of Supply:
Exceptions that affect law of supply may include:
(i) Ability to move stock. (ii) Legislation restricting quantity. (iii) External factors that influence your industry.
Importance of Law of Supply:
(i) Supply responds to changes in
prices differently for different goods, depending on their elasticity or
inelasticity. Goods are elastic when a modest change in price leads to a
large change in the quantity supplied. In contrast, goods are inelastic when
a change in price leads to relatively no response to the quantity supplied.
An example of an elastic good would be soft drinks, whereas an example of an
inelastic service would be physicians' services. Producers will be more
likely to want to supply more inelastic goods such as gas because they will
most likely profit more off of them.
(ii) Law of supply is an economic
principle that states that there is a direct relationship between the price
of a good and how much producers are willing to supply.
(iii) As the price of a good
increases, suppliers will want to supply more of it. However, as the price of
a good decreases, suppliers will not want to supply as much of it. For
producers to want to produce a good, the incentive of profit must be greater
than the opportunity cost of production, the total cost of producing the
good, which includes the resources and value of the other goods that could
have been produced instead.
(iv) Entrepreneurs enter business ventures with the intention of making a profit. A profit occurs when the revenues from the goods a producer supplies exceeds the opportunity cost of their production. However, consumers must value the goods at the price offered in order for them to buy them. Therefore, in order for a consumer to be willing to pay a price for a good higher than its cost of production, he or she must value that good more than the other goods that could have been produced instead. So supplier's profits are dependent on consumer demands and values. However, when suppliers do not earn enough revenue to cover the cost of production of the good, they incur a loss. Losses occur whenever consumers value a good less than the other goods that could have been produced with the same resources.
Determinants of Supply:
(i) Technology changes. Technology helps a producer to minimize his cost of production.
(ii) Resource supplies. The producer also has to pay for other resources such as raw materials and labor. if his money is short on supplying a certain number of products because of an increase in resource supplies, then he has to reduce his supply.
(iii) Tax/ Subsidy. A producer aims to maximize his
profit, but an increase in tax will only increase his expenses, decreasing
his capacity to buy resource supplies and forcing him to reduce his supply.
(iv) Price of other goods produced. A producer may not only produce on product but other products as
well. A producer's money is limited and if he increases his supply in one
product, he would have to decrease his supply in the other product, no unless
his sales increase.
Thus:
Qxs =
Φ (Px) Ceteris Paribus
Ceteris Paribus. In economics, the term is used as a shorthand for
indicating the effect of one economic variable on another, holding constant
all other variables that may affect the second variable.
Difference Between Shift in Supply Curve and Movement:
Movement Along with the Same Supply Curve:
While explaining the law of supply we have stated that as price rise, the quantity
supplied increases and as price falls the quantity supplied increases and as
price provided other things remain the same. This change in the quantity
supplied of a commodity is a movement of one price quantity combination to
another on the same supply curve. Such a movement at varying prices is now
illustrated with the help of the supply curve given in figure 5.2.
Diagram/Figure:
Figure of Movement:
In the above figure (5.2) at price "aT" ($3.00),
"aT" 50 units quantity is supplied. When price rises to dL ($7.0),
the quantity supplied by the producers increases to OL (110 units). The
change in quantity supplied at varying prices is referred as movement along the same supply
curve.
Shifts in Supply Curve:
Shifts in supply curve means changes in supply. While explaining the law of supply, we have stated that that other things remaining the
same (ceteris paribus) the amount of the commodity offered fore sale
increases with the rise in price and decreases with a fall in price. When
there is an increase in supply due to one or more than one non-price factor
(which was held constant) such as production techniques, resource prices,
changes in the price of other commodities, etc., there is a rise in supply.
The entire supply curve shifts to the right of original supply curve
indicating that more quantity is offered fore sale at the same price per time
period.
If due to one or a combination of non-price factors, less
quantity is brought into the market fore sale at each price, the supply is
said to have fallen. In case of fall in supply, the supply curve shifts to
the left of the original supply curve. The rise and fall of supply curve
(shifts in supply curve) is explained with the help of an imaginary schedule
and a diagram.
Schedule of Shifts in Supply
Curve:
Supply schedule of shifts:
Determinants of Supply:
When the supply of the commodity rises or
falls due to non-price determinants, the supply is said to have increased supply or decreased supply. The increases or decrease or the rise or
fall in supply may take place on account of various factors.
They are briefly stated as below:
(i) Changes in Factor Price. The rise of fall in supply may take place due to changes in the
cost of production of a commodity. If the prices of various factor of
production used in the production of a particular commodity increase of it
total cost of production. There will be reduction in the supply of that
commodity at each price because the amount demanded decreases with a rise in
price. Conversely, if the prices of the various factors of production fall
down, it will result in lowering the cost of production and so an increase in
the supply on varying prices.
(ii) Changes in Technique. The supply of a commodity may also be affected by progress in
technique. If an improvement in technique takes place in a particular
industry, it will help in reducing its cost of production. This will result
in greater production and so an increase in the supply of the commodity. The
supply curve will shifts to the right of the original supply curve.
(iii) Improvement in the Means of Transport. The supply of the commodity may also increase due to improvement
in the means of communication and transport. If the means of transport are
cheep and fast, then supply of the commodity can be increased at a short
notice at lower price.
(iv) Climatic Changes in case of Agricultural Products. The supply of agricultural products is directly affected by
the weather conditions and the use of the better methods of production. If
rain is timely plentiful well-distributed; and improve methods of cultivation
are employed then other things remaining the same, there will be bumper
crops. It would then be possible to increase the supply of the agriculture
products.
(v) Political Changes. The increase or decrease in supply may also place due to
political disturbances in a country. If country wages wars against another
country or some kind of political disturbances take place just as we had at
the time of partition, then the channels of production are disorganized. It
results in the decrease of certain goods the supply curve shifts to the left
of originals curve.
(vi) Taxation Policy. If a government levies heavy taxes on the import of particular
commodities, then the supply of these commodities is reduced at each price.
The supply curve shifts to the left .conversely if the taxes on output in the
country are low and government encourages the import of foreign commodities,
then the supply can be increased easily. The supply curve shifts to the right
of originals supply curve.
(vii) Goals of firms. If the firms expect higher profits in the future, they
will take the risk and produce goods on large scale resulting in larger
supply of the commodities. The supply curve shifts to the right.
Backward Bending Supply Curve of Labor:
Definition:
"Wages can increase to a point where less labor is offered
in the market".
Explanation:
We have stated earlier those supply curves are positively
sloped. There can be sometime exceptions to the rule there is a backward
bending supply curve of labor as is illustrated in the following schedule and
a diagram.
Schedule:
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Saturday, 1 March 2014
Law of Supply
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