Supply (Copy)

2.4.1 Definition of Supply

• Supply: The willingness and ability of producers to provide goods and services for sale at a given price in a given time period.
• Key features:
  • Willingness: Producers must want to sell.
  • Ability: Producers must have resources and capacity.
  • Supply always linked to price and time period.
• Example: “At Rs. 200, the firm is willing and able to supply 100 chairs per month.”

2.4.2 Price, Supply and Quantity

• Law of Supply: As the price of a good rises, the quantity supplied rises; as the price falls, the quantity supplied falls (ceteris paribus).
• Direct relationship between price and quantity supplied.

ASCII Diagram: Basic Supply Curve

Price
 |        / S (Supply Curve)
 |       /
 |      /
 |     /
 |    /
 |   /
 +---------------------- Quantity

• The upward slope shows: higher prices → more supplied; lower prices → less supplied.

Movements along the supply curve

• Extension in supply: When price rises, supply extends (movement upwards along the same curve).
• Contraction in supply: When price falls, supply contracts (movement downwards along the same curve).

ASCII Diagram: Extension and Contraction

Price
 |        / B (extension: high price, high Q)
 |       /
 |      /
 |     /
 |    /
 |   / A (contraction: low price, low Q)
 +---------------------- Quantity

• Movement along the curve = caused only by price change.

2.4.3 Individual and Market Supply

• Individual supply: The quantity of a good one firm is willing and able to supply at each price.
  • Example: Firm A supplies 20 units at Rs. 10.
• Market supply: The total quantity supplied by all firms in the industry at each price.
  • Example: Firm A supplies 20, Firm B supplies 30, Firm C supplies 50 → Market supply = 100 units at Rs. 10.

ASCII Diagram: Market Supply = Sum of Individuals

Price
 |        / Sm (Market Supply)
 |       /
 |      /
 |     /
 |    /
 |   /
 +---------------------- Quantity
       I1 + I2 + I3 = Sm

• Market supply is the horizontal summation of individual supply curves.

2.4.4 Conditions of Supply

• Supply can change due to non-price factors (causing shifts in the supply curve).
• A shift is different from a movement:
  • Movement = change in price → same curve.
  • Shift = change in other factors → new curve.

Causes of Shifts in Supply

1. Costs of production:
   • Higher costs (wages, raw materials, energy) → lower supply (shift left).
   • Lower costs → higher supply (shift right).
2. Technology improvements:
   • New technology → more efficiency → increased supply.
3. Taxes and subsidies:
   • Higher taxes → reduce supply.
   • Subsidies → encourage supply.
4. Number of producers:
   • More firms entering → market supply rises.
   • Firms leaving → supply falls.
5. Expectations of future prices:
   • If firms expect prices to rise → may withhold supply now.
6. Weather and natural factors:
   • Especially for agriculture: good harvest = more supply, poor harvest = less supply.

ASCII Diagram: Shift in Supply

Price
 |        / S1 (original supply)
 |       /
 |      /
 |     / S2 (increase in supply)
 |    /
 |   /
 +---------------------- Quantity

• Increase in supply = shift to the right (S1 → S2).
• Decrease in supply = shift to the left.

Summary

• Supply = willingness + ability of producers to sell.
• Law of Supply: Direct relation between price and supply.
• Movements along curve = price changes (extensions/contractions).
• Shifts in supply curve = non-price factors (costs, technology, taxes, firms, weather, etc.).
• Individual supply → aggregated = Market supply.