Supply
Supply, Supply Curve and the Law of Supply
Supply means the quantity of a good that a producer is willing and able to sell at a given price during a given period of time. Like demand, supply is always with reference to a price and a time period. Note the difference between stock (the total quantity available) and supply (the part of the stock actually offered for sale at a price). Market supply is the total quantity all the firms together are willing to sell.
A supply schedule is a table showing the quantities supplied at different prices. Plotting it (price on the vertical axis, quantity on the horizontal axis) gives the supply curve, which slopes upward from left to right:
Supply is part of the stock offered for sale.
- Stock is the total quantity available.
- Supply is the part of the stock actually offered for sale at a given price.
Price and quantity supplied move together.
- As price rises, producers supply more (and vice versa).
- This direct relation gives an upward-sloping curve.
The total of all firms.
- The total quantity all firms together are willing to sell at a given price.
Key Points
- Supply = quantity a producer is willing and able to sell at a given price in a period; stock (total available) vs supply (offered for sale).
- Market supply = all firms together.
- Supply schedule → supply curve (upward sloping: price ↑ → quantity supplied ↑).
The Law of Supply and Its Determinants
The Law of Supply states: other things remaining constant, as the price of a good rises, its quantity supplied rises, and as the price falls, its quantity supplied falls. Price and quantity supplied move in the same direction (a direct relationship). The reason is simple — a higher price means more profit, so producers are willing to supply more.
Besides the good's own price, supply depends on other determinants:
- Prices of inputs (factors) — if raw materials or wages become cheaper, costs fall and supply rises.
- State of technology — better technology lowers cost and raises supply.
- Prices of related/other goods — if another good a firm could make becomes more profitable, it may supply less of this one.
- Government policy (taxes and subsidies) — a tax raises cost and lowers supply; a subsidy lowers cost and raises supply.
- Goals of the firm and number of firms in the market.
As with demand, we must distinguish movement from shift: a change in the good's own price causes a movement along the supply curve (a rise = extension, a fall = contraction of supply); a change in any other determinant causes a shift of the whole curve (right = increase in supply, left = decrease). For example, a fall in input prices shifts the supply curve to the right.
Direct relation, other things constant.
- Other things remaining constant, as price rises quantity supplied rises, and as price falls quantity supplied falls.
A non-price factor changed.
- Lower input cost raises supply at every price.
- The whole supply curve shifts to the right (increase in supply).
Own price changed.
- A change in own price is a movement along the curve.
- A price rise is an upward movement (extension of supply).
Key Points
- Law of Supply: ceteris paribus, price ↑ → quantity supplied ↑ (direct relation).
- Determinants: own price, input prices, technology, prices of other goods, taxes/subsidies, number of firms.
- Own price → movement (extension/contraction); other factor → shift (right = increase, left = decrease).
Elasticity of Supply
Just as demand has elasticity, so does supply. Price elasticity of supply (Eₛ) measures the responsiveness of quantity supplied to a change in price:
Eₛ = (% change in quantity supplied) ÷ (% change in price)
Because price and quantity supplied move in the same direction, elasticity of supply is positive. Its degrees mirror those of demand:
- Elastic supply (E > 1) — quantity supplied changes more than price (flat-ish curve).
- Inelastic supply (E < 1) — quantity supplied changes less than price (steep curve).
- Unit elastic (E = 1) — equal proportionate change.
- Perfectly elastic (E = ∞, horizontal) and perfectly inelastic (E = 0, vertical) — the two extremes.
The percentage method is used to measure it. For example, when the price of a good rises from ₹10 to ₹12, the quantity supplied rises from 100 to 150 units. Then % change in price = (2 ÷ 10) × 100 = 20%; % change in quantity = (50 ÷ 100) × 100 = 50%; so Eₛ = 50% ÷ 20% = 2.5 (elastic supply). Supply is generally more elastic in the long run (firms have time to adjust output and build capacity) and for goods that can be produced or stored easily; it is inelastic for goods that take a long time to produce (like agricultural crops in a single season) or cannot be stored.
Responsiveness of supply to price.
- It measures how much quantity supplied responds to a price change.
- Eₛ = % change in quantity supplied ÷ % change in price.
Find each percentage change.
- %ΔP = (5 ÷ 20) × 100 = 25%. %ΔQ = (20 ÷ 80) × 100 = 25%.
- Eₛ = 25% ÷ 25% = 1.
Firms get time to adjust.
- In the long run firms can change all inputs and build capacity.
- So they can respond more fully to price changes.
Key Points
- Elasticity of supply = responsiveness of quantity supplied to price = %ΔQ supplied ÷ %ΔP (positive).
- Degrees: elastic (>1), inelastic (<1), unit (=1), perfectly elastic (∞), perfectly inelastic (0).
- Measured by the percentage method; supply is more elastic in the long run and for storable/easily produced goods.