THEORY OF SUPPLY

Theory of supply, like theory of demand, is aimed explaining all important aspects of supply, especially law of supply, abnormal supply, etc. Supply simply means ‘offer for sale’ or ‘put forth for sale’

Definition

In economics, supply is defined as follows:-

‘It is the quantity of a commodity which a seller offers for sale (wishes to sell) at a given price in a period of time and in a particular place’.

It is important to note that supply is not the same thing as the total production output. Production output means the total quantity of goods produced in a given period”. That is, supply doesn’t mean quantity produced’ or stock of goods in a warehouse.

Rather it means the quantity puts forth (offers) for sales in a given period. Thus supply is either less or equal to output (quantity produced) but it is never greater than output This implies that supply is a part of output, and not vice versa.

Secondly, ‘quantity supplied’ and ‘quantity sold’ are not the same thing. Quantity supplied is a ways greater or equal to quantity sold and not vice versa.

 

Supply Schedule 

It is a table that shows the various quantities of a commodity which a seller offers for sales at a number of alternative prices in a given period.’

 

Types of supply schedule

There are two types of supply schedule:

1. Individual supply schedule.
2. Market supply schedule.

 

1) Individual supply schedule

It is a table that lists (shows) various quantities of a commodity which an individual (one seller) offers for sale at various prices in a particular period. We give below individual supply schedule of producers or sellers.

 

2) Market supply schedule

The data presented in each of the above tables apply to an individual (one seller). The total quantities supplied by all producers or sellers in a market may be combined in one table. And such a table is referred to’ as “market or Aggregate supply schedule;’. The following table shows market supply schedules:-

 

Market supply schedule is therefore defined as:

“A table that lists (shows) the total quantities of a commodity which all sellers in a market offer for sale at alternative prices in a given period”.

Table 6 illustrates a market supply schedule.

Market Supply Schedule is also referred to as:

1. Aggregate Supply Schedule.
2. Composite supply schedule.

 

Supply Curve

• It is a curve that relates different quantities of a commodity supplied to their various prices. That is, it shows relationship between price and quantity supplied.
• It is a curve that shows the quantity supplied of a commodity at each price.
• It is graphical representation of supply schedule. That is, it is a graphical representation of the relation between quantity supplied at each possible price.

The data in table 1 are plotted or graphically represented in figure I to show a supply curve.

 

Slope of supply curve

The slope of a supply curve indicates that as price rises the quantity which a producer or a seller offers for sale also increases. The slope therefore confirms the economic behaviour of producers and sellers or economic statement that more are produced and offered for sale at a higher price than at a lower price. And this is the second law of supply and demand.

 

Second law of supply and demand

The second law of supply and demand is stated as follows:

The higher the price the higher the quantity that would be supplied’.

The reverse, “the lower the price the lower the quantity that would be supplied”, is another way of expressing the law.

 

Types of supply curve

The following are the major types of supply curve:

1) Individual supply curve

It is a curve that relates the quantity of a commodity supplied by one seller to the prices. It shows the quantity supplied by only one seller at each price. The data in table 1 are used to plot (draw) individual supply curve as shown in figure.

 

2) Market supply curve

It is a curve that relates the total quantity of a product supplied by all sellers in a market to each price. It is the graphical representation of market supply schedule. Thus the data in table 6 are used to plot market supply curve as shown in figure 2 above.

 

Exceptional supply curve

Law of supply states that the higher the price, the higher the quantity that would be supplied. However, they are limitations to this law which take the form of exceptional or abnormal supply. It is a supply that is contrary to (disobeys) the law of supply.

Abnormal supply is a situation in which more is supplied at lower price than at a higher price. While exceptional supply curve is a curve that slopes downward from right to left which implies that the higher the price, the lower the quantity supplied. The following act as limit to, or disobey, the second law of demand and supply:-

1) Vertical Supply curve – agricultural goods and land: It is a curve that is perpendicular to the base. This implies that the quantity supplied remains the same irrespective of changes in price.’

• Agricultural products: This mostly applies to agricultural products. The quantities of agricultural products supplied tend to remain the same amount at a certain period. Thus changes in prices don’t influence supply. That is, prices may increase even quadruple producers or sellers can’t offer more to the market for sales if the stock is exhausted. Conversely, prices may drop (fall) drastically the sellers may be compelled to offer the same quantities for sales if the goods are perishable items (vegetable, fresh tomatoes, fruits, etc ) and there are no storage facilities. Thus either increase or decrease in price does not significantly affect the quantity offer for sales. The quantities supplied tend to remain the same wherever the price. The supply curve is therefore vertical to the base as illustrated in figure,3
• Land – earth surface: Land area is fixed; it can’t be significantly increased or decreased due to changes in price. Thus its supply curve is also vertical to the base as shown in figure 3.

 

2) Backward sloping supply curve – labour: Labour supply at times disobeys the second law of demand and supply. Some, people work more hours, when the wage rate is low than when it is high.

At a lower wage rate, like N50 per hour, they supply or work more hours in order to increase their income. This is indicated by the lower arrow.

As the wage rate rises above N100 per hour, they supply less or work fewer hours as they are satisfied with that amount of income. This is indicated by the upper arrow. Therefore, the lower the wage rate, the higher the quantity offered. This is illustrated in figure 4 given above.

 

3) Horizontal supply curve – securities and fixed prices (control prices): In a perfectly competitive market, the prices of goods are fixed and they can not be changed by the actions of sellers and buyers. Secondly, prices of securities (shares and stocks) tend to remain the same irrespective of changes in quantity supplied. Thirdly, government also fixes prices for certain selected goods through price control. These fixed prices remain the same irrespective of changes in supply. Therefore, their supply curve is horizontal to the base as illustrated in figure 5 below.