SUPPLY FUNCTION

In economics, supply during a given period of time means the quantities of goods which are offered for sale at particular prices. Hence, the supply of a commodity is defined as the amount of that commodity which a seller (or producer) are able and willing to offer for sale at a particular price during a certain period of time. Supply is a relative term. It always referred to in relation to time and price. A statement of supply without reference to price and time conveys nothing in economics. For instance, a statement such as the supply of milk is 500 liter is a meaningless in economics. In economics, one must say, the supply at such and such price and during a specific period. Hence the above statement becomes meaningful if it is said at a price of 20 per liter, a dairy farms daily supply of milk is 500 liters. 1

 Secondly, supply is what the seller is able and willing to offer for sale. The ability of a seller to supply a commodity, however, depends on the stock available with him. Thus stock is the major determinant of supply of a commodity. Determinants of Supply: The supply of the commodity depends not only on the price of the commodity but also on several other factors collectively called the conditions of supply. These conditions are as follows:
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1. Price of the Commodity: Since higher money income is necessary to induce producers to produce more, the amount supplied therefore increases when producers get higher price for the product. 2. Price of Other Goods: Change in the price of other goods in the market also has influence on the supply of the commodity. For Example: if the price of good Y rises, the producer of good X will start considering switching his production to good Y as it has become relatively more attractive to produce Y now then before.
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3.Prices of Factors of Production: the cost of production of a commodity depends upon the prices of different factors of production. When prices of one of the factors are increases, the production cost would be higher and the price of the particular product will be higher as well and vice-versa. This will lead to changes in the profitability of the different commodities and their amount supplied. 4. Producers Objective: the producers may have many objectives like profit maximization, sales revenue maximization, goodwill etc. Amount supplied of a commodity is often influenced by the producers objective. A goodwill maximiser will sell more commodities than the profit maximiser.
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5. Factors Outside Economic Sphere: weather conditions, floods and droughts, epidemics etc do cause fluctuations in the supply of goods, particularly of agricultural goods. Fire, war and earthquakes may destroy productive assets of a commodity and curtail future supply.

6. Tax and Subsidy: A higher tax on commodity or factors of production rise its cost of production and consequently production and supply become less. A subsidy on the other hand, provides incentive to production and augments supplies.
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Supply Function:
Mathematically, the supply function explains the relationship between the quantity supplied for a commodity and its determinants. In supply function, the determinants of supply can be summarized as under:
SX = f (PX, PF, P1Pn, O, T, t, s, u) Where: Sx refers to the quantity supplied of product x. Px refers to the price of product x PF refers to the set of prices of the factor inputs employed for producing X P1..Pn refers to the price of all other related products in an economy. O refers to factors outside the economic sphere T refers to the technology used t refers to tax s refers to the subsidies u refers to all other determinants which are not covered in the above mentioned determinants. 6

Law of Supply:
The law of supply reflects the general tendency of the sellers in offering their stock of a commodity for sale in relation to the varying prices. It describes sellers supply behaviour under given conditions. It has been observed that usually sellers are willing to supply more with arise in price.

Statement of the Law:

CETERIS PARIBUS, the supply of a commodity expand (i.e. rises) with rise in prices and contracts (i.e. Falls) with fall in its prices. The law thus suggests that the supply varies directly with change in its price. So, a larger amount is supplied at higher price than at lower price at market.
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Explanation of the Law: Supply Schedule

Price of ball pen (Rs.) 11 12 13 14 Quantity Supplied (in 000 per Unit) 10 13 20 25

Diagrammatic Representation:

Y S

Prices (Rs.)

Quantity Supplied

Demand Supply Equilibrium):

Equilibrium

(Market

When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.
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 As you can see on the chart, equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity. In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relation to fluctuations in demand and supply. Disequilibrium occurs whenever the price or quantity is not equal to P* or Q*.
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1. Excess Supply If the price is set too high, excess supply will be created within the economy and there will be allocative inefficiency.

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At price P1 the quantity of goods that the producers wish to supply is indicated by Q2. At P1, however, the quantity that the consumers want to consume is at Q1, a quantity much less than Q2. Because Q2 is greater than Q1, too much is being produced and too little is being consumed. The suppliers are trying to produce more goods, which they hope to sell to increase profits, but those consuming the goods will find the product less attractive and purchase less because the price is too high.
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2. Excess Demand
Excess demand is created when price is set below the equilibrium price. Because the price is so low, too many consumers want the good while producers are not making enough of it.

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In this situation, at price P1, the quantity of goods demanded by consumers at this price is Q2. Conversely, the quantity of goods that producers are willing to produce at this price is Q1. Thus, there are too few goods being produced to satisfy the wants (demand) of the consumers. However, as consumers have to compete with one other to buy the good at this price, the demand will push the price up, making suppliers want to supply more and bringing the price closer to its equilibrium.
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