In this note, we are discussing the Concept of Supply, the Law of Supply, and the Supply Curve. Welcome to Poly Notes Hub, a leading site for Engineering Notes for Engineering students.
Author Name: Arun Paul.
Concept of Supply
It is the process of producing and distributing things in response to demand. It entails producing the desired commodities from the available resources and distributing them to the purchasers. The theory of supply in economics is concerned with the relationship between the quantity of an item or service given to the market and the factors that determine that quantity.
Impact of Supply in Business:
- Cost Management
- Competitive Advantage
- Customer Satisfaction
- Inventory Management
- Flexibility and Adaptability
- Risk Mitigation
- Innovation and Growth
- Regulatory Compliance
- Sustainability
- Financial Performance
Law of Supply
The supply of a commodity depends on its price. The law of Supply states that “Other things remaining constant, the supply of a commodity rises as its price rises, and supply falls as price falls. Thus, there is a direct relation between supply and price.“
Key points about the Law of Supply include:
- Direct Relationship: Price and amount supplied are directly correlated, according to the Law of Supply. Producers are encouraged to boost production when a good‘s price increases since they can make more money this way. On the other hand, if prices drop, profits drop as well, which results in less output.
- Positive Slope: A supply curve that slopes upward is the visual representation of the Law of Supply. This shows that the amount given climbs along the vertical axis as the price of an item or service rises along the horizontal axis.
- Time Dimension: Across varying periods, the Law of Supply may behave in various ways. Short-term fixed factors of production may impose constraints on enterprises, resulting in less elastic supply responses. Eventually, companies will have greater flexibility in modifying their input and production capacities, which will lead to more elastic supply reactions.
Supply Curve
The supply curve is a graphical illustration of the relationship between the quantity of an item or service supplied to the market and its price, assuming all other variables remain constant. In essence, it indicates how much of a product producers are willing to deliver at certain price points.
Key features of the supply curve include:
- Upward Sloping: Typically, the supply curve slopes up from left to right, indicating that as the price of the commodity or service rises, so does the quantity supplied by producers. This positive correlation between price and quantity delivered demonstrates the law of supply.
- Reflects Individual Firm or Market Supply: The supply curve can represent the supply behaviour of a single firm or the entire market, depending on the circumstances. In competitive markets, individual firm supply curves are combined to form the market supply curve.
- Shifts in the Curve: Changes in variables other than price, such as production costs, technology, or government policy, can cause the entire supply curve to alter. For example, if the cost of raw materials falls, the supply curve shifts to the right, indicating that supply will rise at all price levels.
- Determinants along the Curve: Each point on the supply curve represents a specific quantity supplied at a particular price. However, as factors influencing supply change, the entire curve may shift left or right. For instance, an increase in the price of inputs would decrease supply at each price level, shifting the curve to the left.
- Long-Run vs. Short-Run Supply: The supply curve can also differentiate between short-run and long-run supply responses. In the short run, firms may be constrained by fixed factors like capital, leading to less elastic supply curves. In the long run, firms can adjust their production capacity and inputs more flexibly, resulting in more elastic supply curves.