Chapter-8

The Theory of Supply

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 SUPPLY
Supply refers to the quantity of a commodity
offered for sale at a given price in a given market at a
given time.
Supply and Stock
Supply refers to the quantity of commodity offered for
sale where as stock is the excess of commodity in the
market(kept not for sale) over the quantity of
commodity offered for sale.
1.Supply is a part of stock
2.Stock is always more than supply.
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 SUPPLY FUNCTION
Supply Function shows the functional relationship
between Quantity Supplied of a commodity and its
various determinants.
Qs = f (Px, Po, Fp, T & G)
Where
Px is the price of the commodity
Po is the price of other commodities
Fp is the price of factors of production,
T is the technique of production
G is the goal of the Producer.
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 SUPPLY SCHEDULE
A supply schedule is a tabular statement that shows a
full account of supply of a particular Commodity at
different prices at certain time in a specific market.
PRICE QUANTITY SUPPLIED
5 50
6 60
7 70
8 80
9 90
10 100

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 120 SUPPLY CURVE
100
100
90

80
80
QUANTITY SUPPLIED

70

60
60
50

40

20

0
0 1 2 3PRICE 4 5 6 7
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 LAW OF SUPPLY
Law of supply establishes the relationship between
price and quantity of goods supplied.
According to this Law, “other things being the same,
when the price of the commodity increases the
quantity supplied rises and when the price of the
commodity falls, the quantity supplied falls.”
It means that the price and quantity supplied move in
the same direction. i.e. They are positively / directly
related.

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MOVEMENT ALONG A SUPPLY CURVE
Extension and Contraction Of Supply

When the quantity supplied increases with the rise

in price, it is called Extension Of Supply.

When the quantity supplied falls with the fall in

price, it is called Contraction Of Supply.

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 SHIFT OF SUPPLY CURVE
INCREASE OR DECREASE OF SUPPLY

If more quantity of a supplied at the same price, due to

favourable change in factors other than price of the
commodity in question It is called increase in Supply.

If less quantity of a supplied at the same price, due to

Unfavourable change in factors other than price of the
commodity in question It is called decrease in Supply.

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 DECREASE INCREASE

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PRICE ELASTICITY OF SUPPLY
√ Elasticity of Supply is the technical term used by
the Economists to describe the degree of
responsiveness of quantity supplied of a commodity in
response to change in price of that commodity.

√ In other words, Elasticity of Supply is the ratio

between proportionate change in quantity supplied
and proportionate change in price.

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 ELASTIC SUPPLY
Elastic supply refers to that situation where
proportionate change in quantity supplied is greater
than proportionate change in its price.

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 INELASTIC SUPPLY
Inelastic supply refers to that situation where
proportionate change in quantity supplied is less than
proportionate change in its price.

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 UNIT ELASTIC SUPPLY
Unit Elastic supply refers to that situation where
proportionate change in quantity supplied is equal to
proportionate change in its price.

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 FACTORS DETERMINING THE
ELASTICITY OF SUPPLY
THE NATURE OF COMMODITY: Perishable
goods are less elastic in Supply whereas durable goods
are Elastic in Supply

PERIOD: In short run the supply is in elastic. and in

the long period supply is elastic.

SCALE OF PRODUCTION: In the case of small

scale of production, the Supply is inelastic whereas in the
case of large scale of production, the supply is elastic. 17
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