PRINCIPLES OF SUPPLY
Supply may be defined as the quantity of goods which a producer is willing and ready to offer for sale at a given price over a given period of time. It can also be defined as the ability and willingness to offer for sale specific quantities of goods or services at alternative prices, over a given period of time.
The quantity of commodity offered for sale in the market is known as effective supply. For example, if a farmer produces 200 tubers of yam and offers 150 to the market for sale, the producer’s effective supply are those 150 tubers he offered for sale in the market.
Law of Supply
The law of supply states that the higher the price, the higher the quantity of produce that will be supplied or the lower the price, the lower the quantity of produce that will be offered for sale.
This law explains that when the price of yam for example is high in the market, large quantities of the yam tubers will be offered for sale because the producer wants to make more profits and vice versa.
Like demand, supply schedule is a table which shows the relationship between price and quantity of commodity supplied. It shows the quantity of goods that can be supplied as the price of goods changes.
This table simply shows that at N100.00, 50kg of rice is supplied while at N20.00, only 10kg of rice is supplied.
Supply curve is a graph showing the relationship between price and quantity of goods supplied or offered for sale. The supply schedule is used to draw the supply curve.
Factors Affecting Supply
- Price: The higher the price of any commodity, the higher the quantity that will be supplied and vice versa.
- Level of technology: Improved techniques reduce cost per unit of product and increase output or supply.
- Cost of production: If the cost of production increases, the producer tends to produce less of a commodity.
- Government policy: Government policy, e.g. subsidy given to farmers, in the form of free importation of equipment can lower production cost and increase supply.
- 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.
- Taxation: An increase in taxation of materials used in production may discourage production, thereby leading to reduction in supply and vice versa.
- 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.
- Number of producers: If the number of producers of a commodity increases, there will be a corresponding increase in quantity supplied.
- Natural disasters: A plague of insects, flood, war, drought or fire will negatively affect the supply of a commodity.
Elasticity of Supply
Elasticity of supply is defined as the degree of responsiveness of supply to little changes in price of goods. Elasticity of supply is represented by the equation:
Elasticity = Percentage change in supply / Percentage change in price
Types of Elasticity of Supply
1) Elastic supply: Supply is said to be elastic if a small change in price leads to a greater change in the quantity of goods supplied. In this case elasticity is greater than one or unity, i.e. E=>1< infinity. This type of elasticity is also known as fairly elastic supply.
2) Inelastic supply: Supply is said to be inelastic if a large change in price leads to a smaller or slight change in the quantity of goods supplied. In this case, elasticity is less than one but greater than zero, i.e. E=>0<1. This type of elasticity can also be described as fairly inelastic supply.
3) Unity or unitary elastic supply: Supply is said to be unitary when a change in price leads to an equal change in the quantity of goods supplied. In other words, a 5% change in price will lead to a 5% change in supply. In this situation, elasticity is equal to one, i.e. E = 1.
4) Perfectly elastic supply or infinitely elastic supply: Supply is said to be perfectly elastic when a change in price brings about an infinite effect on the quantity of goods supplied.
In other words, a slight increase in price can make producers to increase the supply of the commodity while a slight decrease in price will make producers to stop the supply of the commodity. In this case, elasticity is equal to infinity.
5) Perfectly inelastic supply or zero elastic supply: Supply is said to be perfectly inelastic if a change in price has no effect whatsoever on the quantity of goods supplied. In this situation, elasticity is equal to zero, i.e. E= 0.