Total Output:
Output is produced through the process of production. Thus, Total Output can be defined as "The sum total of the quantity of the commodity produced at a given period of time in the economy." Therefore, Total Output is total amount of commodities produced during a period of time with the help of all factors of production employed by the firm.
Stock and Supply:
The term 'Stock' and 'Supply' are different but inter-related. In economics, these two terms have different meaning.
Stock:
Stock is the source of supply, without stock supply is not possible. Stock is the total quantity of commodity available for sale, with a seller at a particular point of time. It is potential supply, by increasing production, stock can be increased. Generally, stock is more than supply because total stock consists of current stock and previous stock.
In case of durable goods, the entire stock of goods may not be offered for sale. If its market price is low, a part of it is stored. But in case of perishable goods like vegetables, fish, etc., stock maybe equal to supply because they cannot be stored for a longer period of time. Hence, stock may be equal or more. than supply. Thus stock can exceed supply, but supply cannot exceed the stock.
Supply:
Supply is a relative term. It is always expressed in relation to price, time and quantity.
Definition of Supply:
According to Paul Samuelson, supply refers to "The relation between market prices and the amount of goods that producers are willing to supply."
Supply is that part of stock, which is actually brought into the market for sale at, a particular time and price. Supply is the flow out of stock. So stock is the source of supply.
Supply refers to quantity of a commodity that a seller (firm) is willing and able to offer for sale at a particular price, during a certain period of time. For example, suppose a farmer produces 2000 kgs. of rice. This is his total stock. At Rs. 30 per kg., if he offers 800 kg. rice for sale at a given period of time. That 800 kg. rice is his actual supply.
From the above explanation, it is clear that concept of supply highlights four essential elements:
i. Quantity of commodity
ii. Willingness to sell
iii. Price of the commodity
iv. Period of time.
Distinction between Stock and Supply:
1. Stock refers to the entire quantity of commodity which exists with the seller. It is potential supply.
Supply refers to the quantity of a commodity offered for sale at a given price and at a point of time.
2. Stock depends upon production, while supply depends on stock and price.
3. Stock is a static concept, whereas supply is a flow concept.
4. Stock exceeds supply. For perishable goods the stock and supply can be same. However, supply cannot exceed stock.
Supply Schedule Individual and Market Supply Schedule
Supply schedule is a table showing different quantities of commodity being supplied at various prices, during a given period of time. There is a direct relationship between price and quantity supplied.
1. Individual Supply Schedule:
Individual Supply schedule refers to a table which shows various quantities of a commodity offered by a single seller for sale at different prices during a given period of time.
2. Market Supply Schedule:
Market Supply schedule refers to a table which shows various quantities of a commodity, offered for sale by all the sellers in the market at different prices, during a given period of time. It is obtained by horizontal summation of supply of all individuals at various prices. It is assumed that market consists of three sellers (A, B and C). It can be explained with the help of a table given below:
• Determinants of Market Supply
The important factors that determine the market supply are as follows:
1. Price of a Commodity:
Price is an important factor influencing the supply of a commodity. More is supplied at a higher price and less is supplied at a lower price.
2. Cost of Production:
If the factor price increases the cost of production also increases. Thus, supply decreases.
3. State of Technology:
Technological improvements reduce the cost of production, which leads to an increase in production and supply.
4. Government Policy:
Government Policies like taxation, subsidies, industrial policies, etc., may encourage or discourage production and supply, depending upon government policy measures.
5. Nature of Market:
In a competitive market, the supply of goods would be more due to large number of sellers. But in monopoly, i.e., single seller market, supply would be less.
6. Prices of other Goods:
An increase in the prices of other goods makes them more profitable in comparison to a given commodity. As a result, the firm shifts its limited resources from production of a given commodity to the production of other goods. For example, an increase in the price of wheat will induce the farmer to use his land for the cultivation of wheat instead of rice. So supply of rice decreases.
7. Infrastructure Facility:
Infrastructure in the form of transport, communication, power, etc., influence the production process as well as supply. Shortage of these facilities decreases the supply.
8. Exports and Imports:
Exports reduce the supply of goods within the country. Whereas imports increase the supply of goods.
9. Future Expectations:
If the prices are expected to rise in the near future, the producer may with hold the stock. This will reduce the supply.
10. Natural Conditions:
The supply of agricultural products depends on the natural conditions. For example, a good monsoon and favourable climatic condition will produce a good harvest, so the supply of agricultural products will increase.
• Law of Supply:
The Law of Supply is introduced by Dr. Alfred Marshall in his book 'Principles of Economics', which was published in 1890. The law explains the functional relationship between price and quantity supplied.
• Statement of the Law:
According to Dr. Alfred Marshall, "Other things being constant the higher the price of the commodity, greater is the quantity supplied and lower the price of the commodity, smaller is the quantity supplied."
The law states that other things remaining the same, the seller will supply more quantity of goods at a higher price and less quantity of goods at a lower price.
• Assumptions of the Law of Supply:
The law of supply is conditional. Since we assume that price alone changes and all other factors determining supply remain constant. These assumptions are, as follows:
1. Cost of Production is unchanged:
It is assumed that there is no change in the cost of production. A change in cost will change profits of the seller and therefore supply at the same price.
2. No change in Technique of Production
It is assumed that there is no change in the method or technique of production. Improved technology may increase supply at, the, same price.
3. Government's Policies remain unchanged:
It is also assumed that Government policies like taxation policy, trade policy, etc., remain unchanged.
4. No change in transport cost:
It is assumed that there is no change in the condition of transport facilities and transport costs. e.g. Better transport facility increases supply at the, same price.
5. No Future Expectations:
The law also assumes that the sellers do not expect future changes in the price of the product.
6. No change in Weather Conditions:
It is assumed that there is no change in the weather conditions. There are no natural calamities like floods, earthquakes which may decrease supply.
7. Prices of other goods remain constant:
The prices. of other goods are assumed to remain constant. If they change, the law of supply may not hold true because producer may transfer resources to other products.
8. Constant scale of production:
It is assumed that the scale of production remains constant during the given period of time.
• Exceptions to the Law of Supply:
There are some exceptional cases, where supply tends to fall with the rise in price or tends to rise with the fall in price. Such exceptions are:
1. Labour Supply:
In case of labour, as the wage rate rises, the supply of labour (number of curve slopes upward, but the supply of labour decreases, with a further rise in the wage rate. Thereafter, supply curve of labour slopes backwards. This is because the worker would prefer leisure to work after receiving higher amount of wages. Thus after a certain point when wage rate rises the labour supply tends to fall.
2. Saving:
Normally, when the rate of interest rises saving increases. But some people want to have fixed regular income, by the way of interest. They may save less at a higher rate of interest and saving tend to rise as the rate of interest falls.
For example, suppose, a person is interested in earning a fixed income Rs. 200. Then he has to save Rs. 5000, when the rate of interest is 4% but with an increase in the rate of interest from 4% to 5%, he will reduce savings from Rs. 5000 to Rs. 4000. This is an exception to the law of supply.
3. Need for Cash:
If a seller is in urgent need for cash, he will supply a large amount of a commodity even at lower price.
4. Agricultural Goods:
The law of supply does not apply to agricultural goods as they are produced once a year and their production depends on climatic condition. Due to unforeseen changes in weather, if the agricultural production is low, then their supply cannot be increased even at higher price.
5. Future expectations about price:
If a seller expects a fall in price in the near future he will be willing to sell more, even at a lower price.
6. Rare Articles:
Antiques, artistic articles are exceptions to the law of supply because a change in price cannot change their supply.
Increase and Decrease in Supply (Change in Supply)
When supply of commodity changes due to change in other factors at the same price; then it is known as 'Change in Supply'. There are two types of changes in supply. They are:
1. Increase in Supply
2. Decrease in Supply
1. Increase in Supply:
Increase in Supply refers to rise in the supply of given commodity, due to favourable changes in other factors such as decrease m the prices of. inputs, decrease in tax, technological upgradation, etc. price remaining constant. The supply curve shifts to the right of the original supply curve. It can be explained with the help of following diagram.
2. Decrease in Supply:
Decrease in Supply refers to a fall in the supply of a given commodity due to unfavourable changes in other factors such as increase in the prices of inputs. increase in taxes, technological degradation, etc. price remaining the same. The supply curve shifts to the left hand side of the original supply curve as shown in the diagram.
• Extension and Contraction of Supply (Variations in Supply)
When quantity supplied of a commodity changes due to change in its price, other factors remaining constant, it is known as Variation in Supply. There are two types of Variation in Supply. They are:
1. Extension in Supply or Expansion of Supply and
2. Contraction of Supply
1. Extension in Supply:
Extension of Supply refers to a rise in the quantity supplied due to an increase in price of a commodity, other factors remaining constant. Extension of supply leads to an upward movement along the same supply curve due to rise in price. It can be better understood from the given diagram.
2. Contraction of Supply:
Contraction of Supply refers to a fall in the quantity supplied, due to fall in price of the commodity, other factors remaining constant. In case of Contraction of supply, there is a downward movement along the same supply curve as seen in the given diagram.
• Concept of Elasticity of Supply and Types of Elasticity of Supply
The concept of Price Elasticity of Supply explains the quantitative change in supply of a commodity, due to given change in the price of the commodity.
Elasticity of Supply may be defined as a ratio of the percentage change or the proportionate change in the quantity supplied to the percentage or proportionate change in the price. In symbolic terms.
Types of Price Elasticity of Supply
There are five types of Price Elasticity of Supply:
i. Perfectly Elastic Supply:
With a negligible change in price there is infinite change in quantity supplied, and if there is slight fall in price supply become zero. Then it is said to be Perfectly Elastic Supply. It can be explained with the help of diagram.
ii. Perfectly Inelastic Supply:
When change in price does not bring about any change in quantity supplied, it is known as perfectly Inelastic Supply.
iii. Unitary Elastic Supply:
When a change in price brings about ,a proportionate change in quantity- supplied, then it is unitary elastic Supply. In this case Es = l.
iv. More Elastic Supply/Relatively Elastic Supply:
When percentage change in quantity supplied is more than the percentage change in price, then it is more elastic supply. Here, the price elasticity of supply is more than one (Es > 1).
v. Less Elastic Supply/Relatively Inelastic Supply:
When percentage change in quantity supplied is less than the percentage change in price, then it is less elastic supply. In this case elasticity. of supply is less than one. So supply curve is steeper.
• Measurement of Elasticity of Supply
Price elasticity of supply can be measured by the following methods:
1. Percentage Method:
This method is also known as 'Ratio Method'. According to this method, elasticity is measured as a ratio of percentage change in the quantity supplied to percentage change in the price.
Ex : Suppose 100 kg Potatoes are supplied, at a price of Rs. 8 and at price of Rs. 10, the supply expands to 125 kg of Potatoes.
If answer is one then it is unitary elastic supply, if answer is more than one, it is more elastic supply, and if answer is less than one, it is inelastic supply.
Elasticity of Supply is always positive because of the direct relationship between price and quantity supplied.
2. Geometric Method:
According to geometric method, elasticity, is measured at a given point on the supply curve. This method is also known as point method.
To measure the price elasticity of supply at a given point on the given supply curve, a tangent is drawn touching supply curve at that point, which meets the X-axis at a certain point. Then a perpendicular is drawn from point 'A'.
Let us now discuss the three different cases of Geometric Method:
i. More Elastic Supply:
The tangent NN is drawn touching supply curve SS at point A. This tangent is extended to meet X axis at point N shown in the diagram. Hence Es > 1.
ii. Unitary Elastic Supply:
The tangent NN to the supply curve SS passes through the point of origin. Hence Es = 1.
iii. Less Elastic Supply:
If the tangent NN meets the X axis before the origin at point N then the supply is inelastic.
• Determinants of Elasticity of Supply
1. Nature of Commodity:
By Nature, commodities are generally classified as perishable goods and durable goods. In the case of perishable commodities like vegetables, fruits, etc., supply is inelastic. Whereas in the case of durable goods like Furniture, T.V, etc., supply is elastic.
2. Time/Period:
In the short run, supply is relatively inelastic, but in the long run supply is elastic.
3. Technique of Production:
When advanced technology is adopted for production, the supply of a product tends to be more elastic on the other hand, the supply remains less elastic, if backward technology is adopted.
4. Cost of Production:
If cost of production is more, supply will be inelastic. However, if the cost of production is less, supply will be elastic.
5. Natural Factors:
The commodity whose production depends on natural factors, such as climatic conditions etc. the supply will be inelastic. For example, agricultural products.
6. Availability of Factors of Production:
If raw material and factor of production are easily available, then supply will be elastic. However, if the factors of production are scarce, supply is inelastic.
7. Scale of Production:
If goods are produced on a small-scale, their supply would be relatively inelastic. However, if goods are produced on a large-scale, their supply would be elastic.
8. Mobility of Factors:
In those industries where there is a high degree of mobility of factors of production, supply will be more elastic.