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Topic: Concept Of Supply
Lesson Objectives: At the end of the lesson, learners should be able to:
- Explain the term supply and effective supply,
- State the laws of supply,
- Describe a supply schedule and supply curve,
- List and explain the different types of supply,
- State the factors affecting supply,
- Describe what happens when there’s a change or shift in supply.
Definition of Supply
Supply may be defined as the quantity of a commodity which a producer is willing and able to offer for sale at a particular price, and at a particular period of time. In other words, the supply of a commodity is the quantity of that commodity which a producer is willing and able to sell at a given price over a period of time.
The supply of a commodity is different from the total stock of a commodity which the producer has produced. Supply simply refers only to the part of the total production actually offered for sale at the ruling market price and at a particular time. This is referred to as effective supply.
Unlike demand, supply moves in the same direction with price. The higher the price prevailing in the market, the higher the quantity of a commodity that the producer is willing to supply and vice versa.
Law of supply
The law of supply states that, all things being equal, the higher the price, the higher the quantity of a commodity that will be supplied or the lower the price, the lower the quantity of the commodity that will be supplied.
This law is often regarded as the second law of demand and supply. This law explains that when the price of a commodity is high in the market, more quantity of it will be supplied by the producer and vice versa.
Supply schedule can be defined as a table showing the relationship between price and the quantity of that commodity supplied. In other words, supply schedule is a table which shows the different quantities of a commodity which would be supplied at various prices and at a particular time.
There are two types of supply schedules. These are individual supply and market supply schedule.
I. Individual suppy schedule: This is a table which shows the different quantities of a commodity which a producer offers for sale at various prices and at a particular time. Let us consider a producer (e.g a farmer) who supplied several bags of rice at various prices as shown below.
Table 1: Individual supply Schedule
Table 1. above shows a farmer’s supply schedule for bags of rice.
The supply schedule indicates the relationship between the various prices of bags of rice and the quantity which the farmer is able to offer for sale. At a time when the price is #20, he was only willing to offer for sale about 10 bags but as the prices increases to as high as #100, he was willing to offer for sale as much as 50 bags of rice.
It is seen that the farmer’s supply is in consonance with the law supply, which states that the higher the price, the higher the quantity of a commodity that will be supplied and vice versa.
ii. Market supply schedule: Market supply schedule is a schedule of all producers or suppliers of a commodity in a market. In other words, a market supply schedule is a table which shows the total quantity of a commodity which all producers of that commodity are willing and able to supply at various prices, at a particular period of time. Table 2. below is an example of market supply schedule. It is a combination of all the individual producers and suppliers in a market.
Table 2: Market Supply Schedule
In the table above, it is assumed that there are only three producers (farmers) of rice. The table also reveals the relationship between the different prices of bags of rice and the total quantity which will be offered for sale by all the producers at each price. The table is thus in consonance with the law of supply which states that the higher the price, the higher the quantity of a commodity that will be supplied.
Supply curve is a graph showing the relationship between price and quantity of that commodity supplied. In other words, a supply curve can be defined as a graphic or diagrammatic representation of a supply schedule. It should be noted that a supply curve is derived from a supply schedule.
Fig 1: A farmer’s (individual) supply curve
Both the individual supply schedule (table 20.3) and market supply schedule (table 20.4) can be illustrated with diagrams or graphs to show an individual supply curve (fig 20.14) and market supply curve (fig 20.15). As a rule and in accordance with the law of supply, supply curve normally slopes upwards from right to left which shows that at a higher price, a higher quantity of a commodity will be offered for sale and also at a lower price, a small quantity will be supplied
Fig 2: Market supply curve
Types of Supply
i. Composite supply: Composite supply occurs when a certain commodity can serve two or more purposes. In other words, the supply of the commodity for one purpose will greatly affect the supply of the same commodity for another purpose. For instance, crude oil. The supply of crude oil (petroleum) for the production of petrol will greatly affect the production of kerosene and other uses of Petroleum. If more petroleum is needed for petrol production, the price of petroleum will rise. People who require petroleum for other purposes will be faced with high price.
ii. Joint or Complementary supply: Joint or Complementary supply occurs when two or more commodities are produced and supplied from one source. An increase in the production and supply of one will automatically bring about increase in the production and supply of the other commodities that are produced from the same source. For example, an increase in production and supply of petrol from petroleum can also lead to an increase in and supply of kerosene. Petrol and kerosene are obtained from the same source which is petroleum.
iii. Competitive supply: Competitive supply occurs when many commodities are supplied for the satisfaction of a particular want. In other words, it is the supply of two or more commodities that serve as substitutes or alternatives to one another, e.g meat and fish, Omo and Elephant blue detergents, butter and margarine, Close Up and Macleans toothpastes, etc.
Factors Affecting Supply
I. Price: The higher the price of any commodity, the higher the quantity that will be supplied and vice versa.
II. Level of Technology: Improved techniques reduce cost per unit of product and increase output or supply.
III. Cost of production: If the cost of production increases, the producer tends to produce less of a commodity.
IV. Government Policy: Government policy e.g subsidy given to farmer’s, in the form of a free importation of equipment can look production cost and increase supply.
V. Weather: If the weather of a particular area is favourable at a particular period, more agricultural products will be produced and their supply to the market will increase.
VI. Taxation: An increase in taxation of materials used in production may discourage production thereby leading to reduction in supply and vice versa.
VII. Price of other commodities: The supply of a commodity will be affected if the prices of other commodities rise. If the price of a substitute like maize increases, the quantity of rice produced will fall.
VIII. Number of producers: If the number of producers of a commodity increases, there will be a corresponding increase in quantity supplied.
Change in Quantity Supplied
A change in the quantity supplied of a commodity means a movement from one point to another on a supply curve. The cause of the change in the quantity supplied is as a result of the change in the price of the commodity under consideration. The quantity of a commodity supplied changes with price. More is supplied at a higher price than at a lower price.
A change in the quantity supplied is of two types:
Fig 3: Increase in the quantity supplied
(a) Increase in the quantity supplied: There is an increase in the quantity supplied if the quantity supplied increases as a result of an increase in the price of the commodity.
In fig 3, an increase in the price of the commodity from #30 to #60 brought about a corresponding increase in the quantity supplied from 40 to 80 units.
(b) Decrease in the world supplied: In this case, there is a decrease in the quantity supplied if the quantity of the commodity supplied decreases as a result of a decrease in price.
Fig 4: Decrease in the quantity supplied
In fig 4. above, a decrease in the price of the commodity from #40 to #20, brought about a corresponding decrease in the quantity supplied from 100 to 50 units.
Shift or Change in Supply
A shift or change in supply in economics is quite different from changei in the quantity supplied as earlier discussed. There is a change in supply if the supply curve shifts to an entirely new position. In this case, there is a completely new supply schedule and supply curve, showing that at the old price, more or less of the commodity would be supplied. A shift or change in supply is determined by the factors affecting supply except price of the commodity.
A shift or change in supply is also grouped into two divisions:
i. Increase in supply: When there is an increase in supply, the supply curve will shift to the right indicating that at the old price, more of the commodity will be supplied. An increase in supply is brought about by a favourable change in the factors affecting supply other than the price of the commodity. For example, if there is improvement in the level of technology, more of the commodity is likely to be supplied at the old price.
In fig 5 below, the supply curve shifted from S0S0 to S1S1. At the old price of 50, the quantity of the commodity supplied increased from 30 units to 80 units.
Fig 5: Rightward shift (Increase) in supply
(b) Decree in supply: When there is a decrease in supply, the supply curve will shift to the left, indicating that at the old price, less of the commodity is being supplied. A decrease in supply is brought about by an unfavourable change in any of the factors affecting supply except the price of the commodity. For example, if there is a change in taxation, e.g increase in taxation against a commodity, the supply for it will fall, at the former price.
Fig 6: Leftward shift (decrease) in supply
In fig 6, the supply curve shifted from S2S2 to S1S1. At the same price of #70, the quantity of the commodity supplied decreased from 120 to 90 units.
Exceptional (Abnormal) Supply
Exceptional or abnormal supplies are supply patterns which do not abide by the laws of Supply and therefore give rise to the reverse of the basic laws of supply. A normal supply curve slopes upwards from right to left showing that at a higher price, more of a commodity will be supplied. But an abnormal supply curve does not follow this rule. An abnormal Supply curve, also called a regressive or backward sloping supply curve, does not slope upwards continuously from right to left thus showing that at higher prices, less quantities will be supplied. That is a negative situation in which a fall in price of the commodity leads to an expansion of its supply.
Fig 7: Abnormal or regressive sure curve
Fig 8: Fixed supply curve
Causes of abnormal supply
i. Existence of some fixed assets: Land is a fixed asset. With time the price of land increases without a corresponding increase in its size. This situation can lead to abnormal supply curve as described. This is an example of a fixed supply curve or zero elastic or perfectly inelastic sure curve.
ii. Rising wages: As wages rate increases, labour would at first increase its effort and the length of time they are willing to work. After a certain wage rate, labour is no longer willing to increase the number of hours worked. They decrease the number of hours they will work at a higher wage rate leading to a supply curve that has more than one slope. This type of curve is known as backward-sloping supply curve.
Fig 9: Backward sloping supply curve
iii. Target income: This situation is more applicable to agricultural products. A farmer who aims at a particular income target may go on supplying the market even when prices fall. Also when prices rise so high that he can quickly attain his target income, he can cut back on supplies.
iv. Monopolistic practices: A sole supplier of a product to a market may hold back supplies even when prices are rising, to push prices still higher up.
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Take a quick test for this lesson
- Explain the term supply and effective supply.
- State the laws of supply.
- Describe a supply schedule and supply curve.
- List and explain the different types of supply.
- State the factors affecting supply.
- Describe what happens when there’s a change or shift in supply.
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