Chapter 10

Supply

DEFINITION:-

Supply is the willingness and ability to sell a good or service. It is not the same thing as
the existing stock’ or amount available’. For example, the supply of housing in a town
consists of the number 9f houses, bungalows and flats, etc. which are up for sale and not
the total number of houses, bungalows and flats, etc. in the town. In the spring the supply
of housing tends to increase as more properties come onto the market.

THE SUPPLY CURVE:-

In most cases the more is supplied the higher the price. So supply curves slope upwards
from left to right. Figure I 0. I shows a supply curve based on the supply schedule in
Table 10. I.
MOVEMENTS ALONG A SUPPLY CURVE:-

Movements along the supply curve are referred to as extensions and contractions or as
changes in the quantity supplied. Figure 10.2 shows an extension in supply. A rise in price
from P to P causes an increase in the quantity supplied from Q to QL To supply larger
quantities firms need higher prices in order to cover their higher costs.

Figure 0.3 shows a contraction in supply .A fall in price from P to P’ causes a decrease in
the quantity supplied from Q to Q’.
CHANGES IN SUPPLY:-

An increase in supply means that more is supplied at each and every price. A decrease in
supply means that less is supplied at each and every price. Figure 0.4 illustrates an
increase in supply from 55 to 5151 This leads to an increase in the quantity supplied at
any given price. For example, at the price P suppliers are now prepared to offer quantity
Q’ whereas under the original supply conditions, at this price, they were only prepared to
supply quantity Q. Similarly at price P1 the quantity supplied has increased from Q2 to
Q3.
Figure I 0.5 illustrates a decrease in supply. The supply curve shifts to the left from 55 to
S1SLThe effect will be to reduce the quantities supplied at all prices.
CAUSES OF CHANGES IN SUPPLY:-

A shift in the supply curve indicates that there has been a change in the conditions
governing supply. For example, if producers are prepared to supply greater quantities at
given prices, shown by a movement of the supply curve to the right, it may indicate that
they have experienced reductions in their labor costs, material costs or capital costs.
Among the possible causes of changes in supply are:

WEATHER:-

The supply of agricultural products is seriously affected by variations in weather

conditions. A bad harvest means that the supply curve moves to the left; a bumper harvest
is represented by a shift of the supply curve to the right.

DISEASE:-

The output of agricultural products can also be affected by disease affecting crops and
disease and illness affecting livestock.

TECHNOLOGICAL PROGRESS:-

Technological progress is a term which covers improvements in the performance of

capital goods and labor in the quality of raw materials, in organization and management,
in factory and office layouts, in communications, in methods of production, and so on. it
is the main source of improvements in productivity and these increases in output per hour
will move the supply curve to the right, because, if other things remain unchanged,
average costs of production will fall.

CHANGES IN THE PRICES OF FACTORS OF PRODUCTION:-

An important determinant of changes in supply is changes in the prices of factors of

production. In creases in wages, the prices of raw materials, fuel and power interest rates,
rent and other factors prices will cause supply to decrease, in less offset by a rise in the
productivity of the factors of production. For example, if wage rates rise by 10% but
labor productivity also increases by 10%, then labor costs per unit have not changed.

CHANGES IN THE PRICES OF OTHER COMMODITIES:-

Changes in the prices of other goods and services may affect the supply of a product
whose price is not changing. If, because of increases in demand, the prices of other goods
and services increase, the production of these goods and services will become more
profitable, and resources would tend to move towards the industries making these more
profitable products. The production of goods and services, with prices unchanged, would
now be less attractive to suppliers.
In the case of products which are substitutes in supply (in competitive supply), a rise in
the price of one product will cause the supply of that product to extend and the other
product/products to decrease, However some products are in joint supply, for instance,
petrol and paraffin. So if there is a rise in the price of petrol this will cause the supply of
petrol to extend and the supply of paraffin to increase.

INDIRECT TAXATION AND SUBSIDIES:-

The imposition of indirect taxes will add an extra cost to producers who are now
responsible for passing a specific amount or a percentage of the price of the product onto
the government. So indirect taxes cause a decrease in supply. Subsidies to producers have
the opposite effect. They increase the incentive and reward for producers and cause
supply to increase.

CHANGES IN THE NUMBER OF PRODUCERS:-

Supply will increase if new firms enter the market. For instance, in the I 990s the number
and range of magazines for sale increased with the rise in the number of producers, many
using desk-top publishing.

UNEXPECTED EVENTS:-

The Gulf War (1990—91) decreased the supply of oil. Natural disasters, for example may
reduce the supply of a range of products.

PRICE ELASTICITY OF SUPPLY:-

Price elasticity of supply is a relationship between the proportionate changes in price and
the proPrke portion ate changes in quantity supplied. The formula used to measure
elasticity of supply is:

Most products have either elastic or inelastic supply. Elastic supply is when a percentage
change in price causes a greater percentage change in supply. Whereas inelastic supply is
when a given percentage change in price causes a smaller percentage change in supply.
Figure I 0.6 illustrates these two degrees of elasticity of supply ((a) and (b)) plus the three
less common types ((c), (d) and (e)).
Note that any straight line passing through the origin will have unit price elasticity of
supply. The proportionate changes in supply will be equal to the proportionate changes in
price.
THE DETERMINANTS OF THE DEGREE OF PRICE ELASTICITY OF
SUPPLY:-

The extent to which supply is elastic depends upon the flexibility and mobility of the
factors of production. If production can be expanded easily and quickly and/or products
can easily be brought out of storage in response to an increase in demand and the
resulting rise in price, supply will be elastic; if not, supply will be inelastic. Similarly,
when demand and price fall, supply will be elastic if production can be cut back quickly
and easily and/or the products can be taken off the market and stored. Among the
influences on the degree of elasticity of supply of a product are the following:

Where an industry is operating below full capacity and so there are unemployed
resources, supply is elastic. The industry will be able to expand production fairly easily
by using more variable factors and bringing into use its previously idle fixed assets.

THE LEVEL OF EMPLOYMENT:-

This is linked to the point above. In a situation of full employment, the supply of most
goods and services will be inelastic. Supply may be increased by improved productivity,
but in the short run no significant increases in output will be possible. Supply in the
domestic market may still be elastic if it is possible to obtain supplies from other
countries, but this may lead to balance of payments difficulties.

THE LEVEL OF SPARE CAPACITY IN THE INDUSTRY

THE ABILITY TO STORE THE PRODUCT:-

Supply will be elastic f the product can be stored. If price rises, the quantity offered for
sale can be increased quickly and easily by drawing on stocks. If price falls, supply can
be reduced by adding to stocks.

WHETHER THE PRODUCTS ARE AGRICULTURAL OR MANUFACTURED

ONES:-

In the case of agricultural products, supply in the short run is inelastic because the
quantity supplied in any one year is governed by the acreage planted in the sowing
season. Some commodities such as natural rubber coffee, and cocoa will be inelastic in
supply over fairly long periods of time since it takes several years for newly planted trees
to reach maturity. So, in the short run, an increase in demand will lead to a sharp increase
in price. The supplies of products such as beef and milk will also be inelastic because it
takes a considerable time to increase the size of the herds of cattle. The supply of
manufactured products tends to be more elastic as the production process is usually
shorter although of course it varies. It takes a few moments, given spare capacity, to raise
the output of paper clips whilst it takes years to increase the output of passenger jets.
THE TIME IT TAKES TO INCREASE CAPACITY:-

In some industries the expansion of capacity takes a long time. Once such industries are
operating at full capacity, therefore, supply will be inelastic (as far as expansion is
concerned) for several years. This is true of mining industries because the sinking of new
mines and the extension of existing ones is a lengthy procedure. Thus, the supply of most
minerals tends to be inelastic.

PRICE ELASTICITY OF SUPPLY AND TIME:-

As indicated above time is an important influence on the elasticity of supply. In most

cases while changes in demand can take place in the short run, especially in markets
subject to changes in fashion or where advertising is very effective, changes in supply,
because of technical problems and the immobility’s of the factors of production, take
much longer It is usual to distinguish three time periods in supply and demand analysis.

THE MOMENTARY PERIOD:-

This is defined as the period of time during which supply is restricted to the quantities
actually available in the market. Supply is fixed (i.e. perfectly inelastic) in the momentary
period, and the supply curve will be a straight line parallel to the price axis. Normally this
period will be a very short one. In the case of perishable products such as fish, fruit, and
vegetables, the supply for the day, in local markets, is limited to the quantities delivered
in the morning.

THE SHORT PERIOD:-

The short period (or short run) is the interval which must elapse before more can be
supplied with the existing capacity. There will be at least one fixed factor of production.
More fish can be supplied by trawler men fishing longer hours or further a field. More
fruit can be supplied by speeding up the harvesting or by using up existing stocks more
quickly. More shoes can be produced by taking on more labor or by working overtime.
The short period in some industries (e.g. the jeans industry) may be only a matter of a
few days, but in others (e.g. house building) it may be many months. The short period,
then, is the period of time which allows for changes to take place in the quantities of the
variable factors employed. Changes in supply in this period are shown as movements
along the supply curve extensions and contractions.

THE LONG PERIOD:-

The long period (or the long run) is the time interval which is long enough to change the
quantity of all factors of production employed, i.e. the whole scale of operation. In other
words, in the long period the quantities of both fixed and variable factors of production
may be changed. Existing firms may increase or reduce their capacity; they may extend
their factories, install more machines, and adopt new methods and so on. New firms may
enter (or existing firms leave) the industry. The fishing industry may expand by bringing
new boats into use; the supply of fruit may be increased by planting more trees; and the
output of the steel industry may be increased by building new plants.

The long run may be a matter of months in the case of some manufacturing and service
industries, or several years in the case of mining, steel production, electricity generating,
or fruit growing. The long run period changes in supply represent changes in the
conditions of supply (the capacity of the industry has changed) and these changes involve
a series of shifts in the short run supply curves. Each short run supply curve describes the
supply situation for a given capacity.

ILLUSTRATING THE THREE TIME PERIODS:-

The relationships described above are illustrated in Figure I 0.7 which shows the effects
of an increase in demand in the momentary period, the short period and the long period. S
is the momentary period supply curve and 51 the original short period supply curve.

In Figure 10.7 (a) the situation following an increase in demand in the momentary period
is shown. Supply is perfectly inelastic and price rises from P to P, that is, by the full
extent of the change in demand.

Figure I 0.7 (b) shows the situation after sufficient time has elapsed for the industry to
react to the increase in demand. The higher price has stimulated a rise in the output of the
existing firms and is represented by a movement along the existing short run supply
curve. Price falls from P to P2.

In Figure I 0.7 (c) the long run positions is shown. This is the time period over which it is
possible for new firms to enter the industry and for there to be an increase in the scale of
production. The supply curve shifts to the right causing price to fall and demand to
extend. The price P3 may be higher or lower than the original price, P, depending on the
extent to which the expansion of the industry has yielded economies of scale or
diseconomies of scale.