Lecture 04-B

Lecture: 04

CONCEPT OF DEMAND & SUPPLY

 

Definition of Supply:

It means the quantities of a commodity offered for sale at different prices during a given period of time.

Prof. Meyers defines supply as “it is a schedule of the amount of a good that would be offered for sale at all possible prices, at any one instant of time or during any period of time, e.g. a day, a week and so on”.

Explanation:

                  The word ‘supply’ or ‘stock’ of a commodity could be distinguished as follows;

-          Stock is the total quantity of a commodity available in or near the market which can be brought for sale at short notice. The stock is a fixed amount, which is not affected by the changes in price.

-          Supply is the quantity which is actually offered for sale out of the existing stock at different prices. The supply increases with a rise in price and vice versa.

If the commodity is durable and the price offered is not acceptable; a part of the stock will be withheld.

 

For Example: If the wheat price reaches to Rs.200/- per maund which is considered as lowest, no owner will be willing to sell at that much low price and eventually owner will cut the supply of wheat as shown in table below. When the prices increases the supply also increases as the owner certainly gets pleased when his product is sell at high price. 

Law of Supply:

            It is the relationship between the price of a commodity and quantity supplied. Normally supply has positive or direct relation with price i.e. quantity supplied moves in the same direction as price, more quantity is supplied at high price is due to the reason that higher the price, the greater will be profit for sellers and the greater inducement for firms to produce more.

Supply Curve:

                        A Supply Curve for a good shows relationship between prices of a good and the quantities which firms offer for sale are at different prices. It is always drawn upward unlike demand curve.

Rise and Fall in Supply (or Shift in Demand Curve)

            When supply for a commodity goes up or down, not due to price but due to other factors, the change is called rise (or increase) in demand and fall (or decrease) in supply. There  are so many factors like cost of production, technology, climatic situation, political situation, taxation policy, prices of substitutes, etc. which can change the supply of a commodity while price remains constant.

Rise in supply (Example):

            There are two types;

1.      FIRST: When Price (P_X) remains constant and quantity supplied increases due to some other factors as shown in table: A and Fig: A given below. 

2.      SECOND: Whereas, when price (P_X) of the commodity decreases and quantity (Qx) remains constant due to other factors. (Ex. Demand of product etc) as shown in Table:B and Fig:B given below.

Fall in Supply (Example):

 There are two types; 1. FIRST: When the Supply of commodity decreases not due to price but due to other factors the change is called fall in demand as shown in table: A and Fig: A. 

2. SECOND: when price increases but quantity remains constant due to other factors and no response is taken to ensure stability in supply the change is called fall in supply as shown in table: B and Fig: B.

Causes may Change Supply (Supply Shifters)

1.      Cost of inputs used to produce the product.

a.      Price of raw materials

b.      Cost of transport

c.       Tax rate

d.      Wage bill

2.      Improving production technology may affect the supply.

3.      Floods, Wars, Govt. policies etc.

4.      Number of sellers.

5.      Law and order situation change.

6.      Expectations about future prices.