The Theory of Supply

Supply in economics refers to the quantity of a commodity that a producer is willing and able to offer for sale at a given price and within a specific period. It is important to distinguish between 'supply' and 'stock'. Stock is the total quantity of a product available, while supply is the portion of that stock brought to the market for sale at a particular price.

The Law of Supply

The Law of Supply states that, all other things being equal (ceteris paribus), the higher the price of a commodity, the higher the quantity supplied, and the lower the price, the lower the quantity supplied. This indicates a direct or positive relationship between price and quantity supplied.

Determinants of Supply

• Price of the Commodity: The primary factor. High prices encourage producers to supply more to maximize profit.
• Cost of Production: If the cost of inputs (labor, raw materials) increases, supply usually decreases as production becomes less profitable.
• Level of Technology: Improvements in technology reduce production costs and increase the efficiency of supply.
• Taxes and Subsidies: Taxes on production reduce supply, while government subsidies (financial aid) increase supply.
• Climate and Weather: Specifically for agricultural products, favorable weather increases supply.
• Number of Producers: The more firms in an industry, the higher the total market supply.
• Future Price Expectations: If producers expect prices to rise in the future, they may hoard goods now, reducing current supply.

Supply Schedule and Supply Curve

A supply schedule is a table showing the different quantities of a commodity that a seller is willing to offer at different prices. A supply curve is a graphical representation of this schedule, typically sloping upwards from left to right, showing the positive relationship between price and quantity.

Movement vs. Shift in Supply

Change in Quantity Supplied: This occurs due to a change in the price of the commodity itself. It is represented by a movement along the same supply curve.

Change in Supply: This occurs due to changes in factors other than the price (e.g., technology, cost of inputs). It is represented by a shift of the entire supply curve to the right (increase) or left (decrease).

Types of Supply

• Joint (Complementary) Supply: This occurs when two or more goods are produced from the same source or process. Example: Beef and Hides from cattle.
• Competitive Supply: This occurs when resources are used to produce one good at the expense of another. Example: Using a piece of land to grow either Yam or Maize.
• Composite Supply: This refers to the total supply of a product that can be obtained from various sources. Example: The supply of energy comes from oil, coal, gas, and solar.

Elasticity of Supply

Price Elasticity of Supply (PES) measures the degree of responsiveness of quantity supplied to a change in price.

Formula: PES = (% Change in Quantity Supplied) / (% Change in Price)

Degrees of Elasticity:

• Elastic Supply (PES > 1): Quantity supplied changes by a larger percentage than the price change.
• Inelastic Supply (PES < 1): Quantity supplied changes by a smaller percentage than the price change.
• Unitary Elastic Supply (PES = 1): Percentage change in quantity equals the percentage change in price.
• Perfectly Elastic Supply (PES = ∞): Supply is infinite at a specific price. Curve is a horizontal line.
• Perfectly Inelastic Supply (PES = 0): Quantity supplied remains constant regardless of price. Curve is a vertical line.

Determinants of Price Elasticity of Supply:

• Time Period: Supply is more elastic in the long run than in the short run.
• Cost of Storage: Goods that are easy to store have more elastic supply.
• Nature of the Product: Perishable goods have inelastic supply because they cannot be stored for long.
• Mobility of Factors: If labor and capital can move easily between industries, supply is more elastic.