Introduction to Supply

 

Learning Contents:                                                            

·         Understanding Supply and Law of supply

·         Supply Vs. Quantity Supplied

·         Relationship between Supply and Stock

 

Understanding Supply and Law of Supply

Just as a consumer who consumes the various goods and services, so a producer produces and makes them available in the market.  A producer would produce and willing to supply more of those goods and services which can be sold at higher prices or maximizes his profits and vice versa.  Supply refers to the maximum amount of goods and services that producers are able and willing to sell at different possible prices in the market.

Lets understand this with the help of an example, suppose the price of any specific medical treatment rises, it will encourage all health-care firms to expand their production to take several actions: Research and Development of vaccine; investment in diagnostic systems or laboratory services, training or equipping medical staff with latest technology, handling emergency situations; supplying adequate medical equipment's or resources; and open more health care centers or keep them open for long hours, etc. This example showing a positive relationship between price and quantity supplied which means more quantity of goods and services is supplied at higher prices and less is supplied at lower prices also called the Law of supply. The law of supply, like the law of demand, assumes that all other factors except own price of the commodity that affect supply remain constant.

Supply vs. Quantity Supplied

Quantity supplied indicates the specific quantity of commodity that sellers are willing and able to sell at a specific price. It considers the specific point on the supply curve or one quantity on the supply schedule. For example- At price of ₹20, seller sells 50 units of the commodity, it is called quantity supplied. On the other hand, Supply refers to the various quantities of the commodity that sellers are willing and able to sell at different possible prices.  It represents the entire supply curve or all quantities of the commodity. For example- When price of the commodity is ₹10, a seller is willing to sell 5 units of the commodity. When price rises to ₹20, he is willing to sell 35 units. Further, if price rises to ₹30, he sells 45 units of the commodity. Thus, supply shows all these possible quantities which a seller can sell at different possible prices.

     Relationship between Supply and Stock

1.      Stock is the basis of supply

Stock indicates the total quantity of the commodity available with the producer for the present or future sale. A producer not only produces or sells commodity but also maintains the stock of it. In other words, how much quantity of a commodity a seller is willing to sell not only depends on the current production but also the availability of the stock?  A seller can sell more quantities of the commodity if he maintains sufficient stock of commodities with him. Therefore, Supply is also dependent on the stock and one can increase the supply when the stock is increased.

2.      Supply-Stock price relationship

Supply is always related to the price because commodities are always sold in the market at some particular price. Generally, higher the price, higher the supply and vice-versa. On the other side, stock is not related to the price of the commodity as it represents the ‘inventory’ of the firm.

3.      Stock is generally more than supply

Supply generally depends on the stock availability. Whereas, stock doesn’t depend on supply. Also, stock is generally more than supply.  Whereas, supply can be less than or equal to stock but can never exceed stock at a given point of time. For example- Supposing, a farmer has a stock of 100 kg rice and the market price of rice is ₹100 per kg. If at this price, he sells or supplies only 20 kg rice, it is called the ‘supply’. Hence, Supply of rice can be less than or equal to 100 kg but not greater than 100 kg.

4.      Static/ Flow concept

Stock is a static concept i.e. fixed which is measured at a specific point of time. It represents the quantity of the commodity is available at a particular point of time. For e.g. current availability of sugar in the godown. On the other hand, supply is a dynamic or flow concept i.e. it keeps on changing and measured over the period of time. For example- Hourly/ Daily/ Weekly/ Monthly sale of sugar.

5.      Stock is the outcome of production

Stock is the outcome of the production. It also represents inventory. More production leads to more stock availability. Therefore, increase in production leads to increase in stock.

6.      Objective

The objective of keeping stock is to meeting the unexpected rise in demand of the commodity, handling emergency situations, etc. Whereas, the objective of supply is to sell the commodities in the market and generating revenue out of it.

Let’s try some questions

Choose the Correct Answer

1. The supply of a good refers to:

a. Stock available for sale

b. Total stock in the warehouse

c. Actual production of the good

d. Quantity of the good offered for sale at a particular price per unit of time

2. According to law of supply:

a. there is positive relation between supply and price

b. there is negative relation between supply and price

c. there is constant relation between supply and price

d. there is no relation between supply and price

3. The quantity supplied of a good is

 

a. equal to the difference between the quantity available and the quantity desired by all consumers and producers.

b. the same thing as the quantity demanded at each price.

c. the amount that the producers are planning to sell at a particular price during a given time period.

d. the amount the firm would sell if it faced no resource constraints.

4. Which of the following is incorrect statement about supply?

a. Supply depends on stock

b. Supply is static concept

c. Supply is related to the price

d. Supply is generally less than stock

5. Which of the following statement is correct?

a. Supply increases with fall in price

b. Supply falls with increase in price

c. Supply increases with rise in price

d. Supply never changes when price changes

Answer Key

 

1.d	2.a	3.c
4.b	5.c

 

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