Author Topic: Theory of Supply  (Read 138 times)

Offline Raisa

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Theory of Supply
« on: February 02, 2018, 07:16:57 PM »
Supply is a schedule which shows the amounts of a product a producer is willing and able to produce and make available for sale at each price in a series of possible prices during a specified period. The amount the firms are willing to sell may not be the same as the amount they succeeded in selling.

Determinants of Quantity Supplied: How much of a commodity will firms be willing to produce and offer for sale? It depends on a number of factors. The main factors are shown below:

•   Price of the commodity
•   Price of other goods produced
•   Price of factors of production
•   The goals of the firm
•   Expected future price
•   The state of the technology
•   Number of suppliers
•   Taxes and subsidies

The price of the commodity: If the price of the commodity is higher, firms will produce and sale more of the commodity; and if the price of the commodity is lower, firms will produce and sale less of the commodity.

The price of other goods produced: The supply of a commodity is influenced by the price of the other goods produced. For example, a piece of land can produce either potato or wheat. So, these two commodities are substituted in production. . If the price of potato increases, the supply of wheat will be lower. People will use their land in producing potatoes. Therefore, an increase in the price of the substitute in production lowers the supply of the commodity. Commodities can also be complements in production. Complements in production arises when two things are, of necessarily, produced together. For example, cattle produce beef and cowhide. An increase in the price of anyone of these by products of cattle increases the supply of the other.

Prices of factors of production: The prices of factors of production used to produce a commodity influence its supply. For example, an increase in the prices of the labor and the capital machineries used to produce audio cassettes increase the cost of producing audio cassettes; so the supply of audio cassettes decrease.

The goals of the firm: Normally, the firm is assumed to have the single goal of profit maximization. Firms might have other goals either in addition to or substitutes for profit maximization. If the firm worries about risk, it will pursue safer lines of activity even though they promise lower probable profits. If it wants good image in society, it will produce and supply less quantity to ensure more quality.
Expected future price: Assumed that the price of any commodity will rise after six months, the commodity will be stored for sale after six months and the supply of that commodity will be lower at present. On the other hand, if there is a possibility of decreasing the price of the commodity after few months, the supply of the commodity will be more at present.
The state of technology: Invention of new technologies that enable the producers to produce their commodity at lower cost (use of less factors of production or cheaper factors of production), which increases their profits, and they increase supply. For example, the invention of transistors and silicon chips has revolutionized production in television. And thus the supply of television has increased.

Number of suppliers: Other things remaining the same, the larger the number of firms supplying a commodity, the larger the supply of the commodity.

Taxes and subsidies: Producers treats most taxes as costs. Therefore, an increase in sales taxes will increase costs and reduce supply. On the other hand, subsidies are reverse of taxes. If the government subsidizes the production of a good, it will lower cost and increase supply.

The Relationship between Price and Quantity Supplied: Law of Supply: If all other factors remain constant, there exists a relationship between commodity’s own price and quantity supplied. The relationship is called the law of supply.

The law of supply simply states that ‘other things remaining the same, the higher the price of a commodity, the higher the quantity supplied; and the lower the price of a commodity, the lower the quantity supplied’.