1. Supply and stock
Supply is the quantity a seller is willing and able to offer for sale at a given price in a given period. Stock is the total quantity held at a point of time.
- Supply can at most equal stock in the short period.
- Perishable goods: supply is close to stock.
- Durable goods: sellers may hold back stock and supply less.
| Stock | Supply at today's price | Why | |
|---|---|---|---|
| Kochi fisherman (imagined) | 500 kg | 500 kg | Perishable: must sell almost all today |
| Saharanpur woodcraft dealer (imagined) | 300 boxes | 120 boxes | Durable: holds back 180 for a better price |
Key terms
- Supply
Quantity offered for sale at a given price during a given period.
- Stock
Total quantity of a good held by a seller at a point of time.
2. Determinants of supply and the supply function
Sx = f(Px, Pf, T, Tx, G, Pr, N): own price, prices of factors, technology, taxes and subsidies, goal of the firm, prices of related goods, number of firms.
Lower costs (cheaper inputs, better technology, subsidies), a sales goal and more firms increase supply; higher costs, taxes and dearer competing products decrease it.
| Determinant | Change | Effect on supply |
|---|---|---|
| Own price (Px) | Rises | Extension (movement up the curve) |
| Prices of inputs (Pf) | Rise | Decrease (shift left) |
| Technology (T) | Improves | Increase (shift right) |
| Taxes / subsidies (Tx) | Tax up / subsidy up | Decrease / increase |
| Goal of the firm (G) | Sales rather than profit | Increase |
| Prices of related goods (Pr) | Competing good dearer | Decrease |
| Number of firms (N) | More firms | Increase in market supply |
Key terms
- Supply function
The relationship between quantity supplied and its determinants.
- Competing good
Another product that uses the same resources, such as wheat and mustard on the same land.
3. The law of supply and market supply
Law of supply: other things constant, quantity supplied rises with price and falls with it; the curve slopes upward, because extra output usually costs more and a higher price makes it profitable.
Market supply is the horizontal sum of individual supplies: add quantities at each price.
| Price per packet (₹) | Unit A | Unit B | Unit C | Market supply |
|---|---|---|---|---|
| 100 | 10 | 5 | 0 | 15 |
| 200 | 20 | 15 | 10 | 45 |
| 300 | 30 | 25 | 20 | 75 |
| 400 | 40 | 35 | 30 | 105 |
Key terms
- Horizontal summation
Adding the quantities of all sellers at each price to get market supply.
4. Exceptions to the law of supply
- Labour: beyond a high wage the supply curve bends backward as workers prefer leisure.
- Rare goods: quantity cannot be increased.
- Agricultural goods: output fixed until the next season.
- Expectations: a trader expecting a price rise may withhold stock now.
| Exception | Imagined example | Why the law fails |
|---|---|---|
| Labour at high wages | A Chennai surgeon cuts her hours after a fee rise | Prefers leisure at high income |
| Rare goods | Old Mughal coins | Quantity cannot be increased |
| Agricultural goods | Punjab wheat after sowing | Output fixed until next season |
| Expected price rise | A Guntur chilli trader withholds stock | Sells less now to sell later at more |
Key terms
- Backward-bending supply curve of labour
A labour supply curve that turns back at high wages, as hours worked fall.
5. Movement along versus shift of the supply curve
| Movement | Shift | |
|---|---|---|
| Cause | Own price | Other determinants |
| More | Extension | Increase |
| Less | Contraction | Decrease |
On a diagram, a movement changes the point on one curve; a shift moves the whole curve.
| Movement along the curve | Shift of the curve | |
|---|---|---|
| Cause | Change in the good's own price | Change in any other determinant |
| Upward / rightward | Extension: more at a higher price | Increase: more at every price |
| Downward / leftward | Contraction: less at a lower price | Decrease: less at every price |
| Diagram | Point moves on one curve | Whole curve moves to S2 |
Key terms
- Extension of supply
More supplied at a higher own price, on the same curve.
- Increase in supply
More supplied at every price because another determinant changed.
6. Elasticity of supply
Es = (ΔQ ÷ Q) ÷ (ΔP ÷ P), using the original values; Es is normally positive.
Degrees: perfectly elastic (∞, horizontal), perfectly inelastic (0, vertical), unitary (1), relatively elastic (> 1), relatively inelastic (< 1).
Geometric method for straight lines: meets the price axis → Es > 1; passes through the origin → Es = 1; meets the quantity axis → Es < 1.
| Degree | Coefficient | Curve | Imagined example |
|---|---|---|---|
| Perfectly elastic | Es = ∞ | Horizontal line | Any quantity of printed forms at a fixed rate |
| Perfectly inelastic | Es = 0 | Vertical line | Seats for one cricket match |
| Unitary elastic | Es = 1 | Straight line from the origin | Mango boxes from a Ratnagiri orchard |
| Relatively elastic | Es > 1 | Line meeting the price axis | Sarees from a Surat weaver |
| Relatively inelastic | Es < 1 | Line meeting the quantity axis | Brass lamps from a Moradabad unit |
| Step | Working | Result |
|---|---|---|
| Percentage change in quantity | (52 − 40) ÷ 40 × 100 | 30 per cent |
| Percentage change in price | (600 − 500) ÷ 500 × 100 | 20 per cent |
| Es | 30 ÷ 20 | 1.5 |
| Degree | Es > 1 | Relatively elastic |
Key terms
- Elasticity of supply
Responsiveness of quantity supplied to a change in the good's own price.
- Unitary elastic supply
Quantity supplied changes in the same proportion as price.
Exam tips
Common mistakes
- Defining supply without a price and a period, or treating it as the same as stock.
- Calling a change caused by the own price a shift, or a change caused by costs an extension.
- Adding prices instead of quantities when deriving market supply.
- Dividing by the new values instead of the original ones in the percentage method.
- Judging elasticity of a straight supply line by its slope instead of where it meets the axes.
How marks are usually awarded
- 1 mark: one correct option or term.
- 2 marks: definition with an example, or formula and answer.
- 3 marks: working, answer and the degree, or three explained points.
- 5 marks: parts answered in order, with described diagrams and reasons.