Supply in Economics: Meaning, Law and Elasticity of Supply (With Diagram)

Meaning of Supply:

Supply means the quantities that a seller is willing and able to sell at different prices. It is obvious that if the price goes up, he will offer more for sale.

But if the price goes down, he will be reluctant to sell and will offer to sell less.

Supply thus varies with price. Just as we cannot speak of demand without reference to price and time, similarly we cannot speak of supply without reference to price and time.

Supply is always at a price. The supply of any good may then be defined “as a schedule of respective quantities of the good which people are ready to offer for sale at all possible prices.” Just as demand implies willingness and ability to pay, in the same manner the phrase ‘ready to offer for sale’ in the definition of supply given above implies both willingness and ability to deliver the goods.

Like demand, supply is also relative to a person, place and time:

It would be different in a different place, at a different time and with a different person. When we say that A is willing to supply 100 quintals of wheat at Rs. 100 per quintal, we mean that he will do it in a particular set of circumstances. Any change in these circumstances will bring about a change in the supply.

Distinction between Supply and Stock:

The terms ‘supply’ and ‘stock’ are often confused. A clear understanding of the difference between the two is essential. Stock is at the back of supply. It constitutes potential supply. Supply means the quantity actually offered for sale at a certain price, but stock means the total quantity which can be offered for sale if the conditions are favorable. At any time, the godowns in the ‘mandi’ may be full of wheat. This is the stock. If the price is low, very little wheat will come out of the godowns.

The quantity that actually comes out is the supply. The stock will change into supply and vice versa according as the market price raises or falls. In case of perishable articles, like fresh milk and vegetables, there is no difference between stock and supply. The entire stock is supply and has to be sold off for unless it is disposed of quickly, it will perish.

Supply Schedule:

Corresponding to the demand schedule of milk, we have a supply schedule of the milkman in a village. We notice that as the price falls, less milk is being offered for sale, and as price rises, the milkman is prepared to sell more.

Quantity of Milk Offered (in Litres):

Supply Curve of an Individual Seller:

The supply schedule can be represented in the form of a curve, as given below (Fig. 24.1).

Quantities of milk offered for sale are measured along OX and prices along OY. The supply curve SS’ slopes upwards as we go from the left to the right. This means that as the price rises, more is being offered for sale and vice versa.

Law of Supply:

From a study of the supply schedule and supply curve, we can formulate the law of supply thus:

“In a given market, at any time, the quantity of any goods which people are ready to offer for sale generally varies directly with the price.”

‘Varies directly means that as price rises the quantity offered increases, and as it falls, the quantity offered decreases. It should be noted that, in the case of demand, the quantity demanded varies inversely with the price, i.e., as price rises, demand decreases, and vice versa.

The law of supply may be put in another way. “Other things remaining the same, as the price of a commodity rises, its supply is extended, and as the price falls, its supply is contracted.”

When prices are low many individuals and firms do not find it worth-while to sell, for their costs may be high and profits will be low. But, when prices rise, they are in a position to carry on production with profit and sell more. Higher prices mean higher profits. The desire for larger profits carries production to the farthest limit yielding a net profit.

Some Exceptions:

There are some exceptions to the law of supply:

(a) In an auction, goods are sold away whatever the bid. It is possible that the seller is badly in need of money and wants a certain amount of it. As soon as that amount is made up, he will refuse to sell more. The higher the price, the smaller the quantity he will need to sell in order to get the required amount. It is also possible that a person wants to get rid of a quantity of goods as in the case of a person going abroad. In such a case, he will sell away all that he has, whatever the price offered.

(b) When a further heavy fall in price is expected, the sellers may become panicky. They will sell more even if the price falls.

These exceptions, however, do not falsify the law of supply enunciated above. Generally the law holds good. Extension and Contraction of Supply and Increase and Decrease of Supply. As in the case of demand, so in the case of supply, a distinction must be made between extension and contraction on the one hand, and increase and decrease, on the other. This is in fact a distinction between a movement along the supply curve and shift of supply Curve.

Extension and Contraction, i.e. Movement along the Supply Curve:

When the quantity offered for sale increases or decreases merely because price has risen or fallen, we use the terms extension and contraction of supply. The supply schedule is the same and we travel up and down the same supply curve.

Increase and Decrease, i.e., Shift of the Supply Curve:

If, on the other hand, the change in the quantity offered for sale is caused, not by a change in price, but by a change in the conditions of supply, we say that supply has increased or decreased or the supply curve has shifted from its previous position. The change in the condition of supply implies a change in the technical conditions: perhaps a new process or a new material has been discovered, a new labour-saving device has been discovered, or raw materials and other factors have become cheaper.

On account of these new developments, the manufacturer may be able to offer more for sale even if the price has remained the same or gone down. If the conditions have become unfavorable, he will not be able to supply the same quantity at the old price. Extension of supply means that more is offered at a higher price, while increase in supply signifies that either more is offered at the same price or the same quantity is offered at a lower price.

Contraction and decrease in supply are the opposites of extension and increase in supply respectively. Contraction of supply means that less is offered at a lower price, but decrease in supply means that less is offered at the same price or the same quantity is offered at a higher price.

These changes can be illustrated with the help of diagrams as under:

Prices are measured along OY and quantities offered for sale along OX. SS’ is the old supply curve and BB’ is the new supply curve. Fig. 24.6 shows extension and contraction of demand. At PM Price, amount OM is offered, but at the price P’M’ (which is higher than PM), OM’ is offered, which is more. Fig. 24.7 shows an increase in supply, for OM’ (i.e., more) is offered instead of OM at the same price (PM = P’M’). Also, the same quantity OM is offered at a lower price LM. In Fig. 24.8, OM’ (i.e., less) is offered in place of OM, although price is the same (P’M’=PM). Also, the same quantity OM is offered at a higher price LM. This means a decrease in supply.

Elasticity of Supply:

Meaning of Elasticity of Supply:

The law of supply says that the supply varies directly with the price. If the price rises, the quantity offered will extend, and as it falls the quantity offered will contract. This attribute of supply, by virtue of which it extends or contracts with a rise or fall in price, is known as the Elasticity of Supply. It refers to the sensitiveness or responsiveness of the supply to changes in price.

Cases of Inelastic Supply:

But supply may not always respond to the changes in price at the same rate If the commodity is perishable, e.g., fresh milk, ripe fruits, fresh vegetables, etc. the supply cannot be withheld and the whole of it must be offered for sale, whatever the price. In this case, as already pointed out, there is no difference between stock and supply. In other words, the supply is inelastic, i.e., it is insensitive to a change in price. The: price may be falling but the commodity will have to be sold away.

In the same manner, if the production of a commodity requires a large fixed «.4pital, say, iron and steel products, cement, aero-planes, motor-cars, etc., the apply cannot be quickly increased when the price rises, or decreased when it falls.

The same is the case with a commodity which takes a long time to be put on the market. For example, you can increase the supply of wheat or cotton only in a year’s time at the next harvest. In this case too, it is difficult to adjust the supply to demand immediately. In such cases, the supply is called inelastic or less elastic.

Elastic Supply:

But if there is a very large stock of commodity already in existence and the commodity can be stocked, or kept back without loss, then the supply put on the market will vary with price. More will be offered when the price is high, and less when it is low. The supply of such a commodity is said to be elastic.

To sum up:

We can say that if a small change in price (rise or fall) leads to a big change in supply (extension or contraction), the supply is elastic; on the other hand, if a considerable change in price (rise or fall) leads to only a small change in supply (extension or contraction), it is inelastic or less elastic. It should, however be noted that the supply of no commodity is absolutely inelastic; hence, as Marshall says, we should call it comparatively inelastic or less elastic.

Diagrammatic Representation:

Figure 24.9 represents inelastic supply and Fig. 24.10 elastic supply. Price is measured along OY and quantity offered along OX.

In Fig. 24.9, when the price rises from PM to P’ M ‘ (which is a considerable rise), the quantity offered extends from OM to OM’ only, which is not much. Hence supply is less elastic.

In Fig. 24.10, the-rise from PM to P M is not so large, but the extension of supply from OM to OM ² is quite considerable. Hence the supply is elastic.

Elasticity of Supply and Marginal Costs:

The elasticity of supply is really the measure of the ease with which an industry can be expanded, and it can be judged from the behaviour of the marginal costs. If a slight increase in price is followed by the entry of many new firms having minimum average cost equal to price and the marginal cost does not rise, the supply is said to be perfectly elastic.

In case, however, the increased output can be obtained only by an infinite increase in price and yet no new firm is attracted to the industry, the supply will be inelastic. In between these two extremes, there will be different degrees of elasticity. The degree of elasticity will depend, in a particular case, on the slope of the marginal cost curve and the shape of the average cost curves of the successive firms.

“The relation between price and the quantity supplied is rather like the relation between a whistle and a dog—the louder the whistle the faster comes the dog; raise the price and the quantity supplied increases. If the dog is responsive—in economic terminology elastic—quite a small crescendo in the whistle will send him bouncing along. If the dog is unresponsive or ‘inelastic’, we may have to whistle very loudly before he comes along at all.”