Table of Content: 

1. DETERMINANTS OF SUPPLY
2. THE LAW OF SUPPLY
3. MOVEMENTS ON THE SUPPLY CURVE – INCREASE OR DECREASE IN THE QUANTITY SUPPLIED
4. ELASTICITY OF SUPPLY 
5. EQUILIBRIUM PRICE
6. Types of Supply Elasticity 

DETERMINANTS OF SUPPLY

Although price is an important consideration in determining the willingness and desire to part with commodities, there are many other factors which determine the supply of a 
product or a service. These are discussed below:

• Price of the good
• Prices of related goods
• Prices of factors of production
• State of technology
• Government Policy
• Nature of competition and size of industry
• Expectations
• Number of sellers

THE LAW OF SUPPLY

In general, producers are prepared to sell their product for a price if that price is at least as high as the cost to produce an additional unit of the product. Therefore, the willingness to supply depends on the price at which the good can be sold as well as the cost of production for an additional unit of the good. The greater the difference between those two values, the greater is the willingness of producers to supply the good.

Supply refers to the relationship of quantity supplied of a good with one or more related variables which have an influence on the supply of the good. Normally, supply is related with price, but it can also be related with other factors such as the type of technology used, scale of operations etc.

The table shows the quantities of good X that would be produced and offered for sale at a number of alternative prices. At Re 1, for example, 5 kilograms of good X are offered for sale and at ` 3 per kg. 45 kg. would be forthcoming for sale.

We can now plot the data in table 10 on a graph. In Figure 25, price is plotted on the vertical axis and quantity on the horizontal axis, and various price-quantity combinations of the schedule 10 are plotted.

When we draw a smooth curve through the plotted points, what we get is the supply curve of good X. The supply curve is a graphical presentation of the supply schedule. The supply curve shows the quantity of a good that producers are willing to sell at a given price, holding constant any other factor that might affect the quantity supplied. The supply curve is thus a relationship between the quantity supplied and the price. To be more precise, the supply curve shows simultaneously:
(a) the highest quantity willingly supplied by the suppliers at each price and 
(b) the minimum price which will induce suppliers to offer the various quantities for sale 

MOVEMENTS ON THE SUPPLY CURVE – INCREASE OR DECREASE IN THE QUANTITY SUPPLIED

When the supply of a good increase as a result of an increase in its price, we say that there is an increase in the quantity supplied and there is an upward movement on the supply curve. A rise in market price causes an expansion of supply; there is a upward movement on the supply curve and producers offer more for sale. When market price falls, there is contraction of supply as producers have less incentive to offer products for sale in the market. 

ELASTICITY OF SUPPLY 

The elasticity of supply is defined as the responsiveness of the quantity supplied of a good to a change in its price. Elasticity of supply is measured by dividing the percentage change in quantity supplied of a good by the percentage change in its price i.e.,

EQUILIBRIUM PRICE

In the previous sections, we have discussed both demand and supply theories. We shall now use demand and supply to determine equilibrium market price. The equilibrium price in a market is determined by the intersection between demand and supply. It is also called the market equilibrium. At this price, the amount that the buyers want to buy is equal to the amount that sellers want to sell. The competitive market equilibrium represents the ‘unique’ point at which both consumers and suppliers are satisfied with price and quantity. Equilibrium price is also called market clearing price.

The determination of market price is the central theme of micro economic analysis. Hence, micro-economic theory is also called price theory.
The following table presents the concept of the equilibrium price

The equilibrium between demand and supply is depicted in the diagram below. Demand and supply are in equilibrium at point E where the two curves intersect each other. It means that only at price ` 3 the quantity demanded is equal to the quantity supplied. The equilibrium quantity is 19 units and these are exchanged at price ` 3. If the price is more than the equilibrium level, excess supply will push the price downwards as there are few takers in the market at this price. For example, in Table 11, if price is say ` 5, quantity demanded is 6 units which is quite less than the quantity supplied (31 units). There will be excess supply in the market which will force the sellers to reduce price if they want to sell off their product. Hence the price will fall and continue falling till it reaches the level where the quantity demanded becomes equal to the quantity supplied. Opposite will happen when quantity demanded is more than the quantity supplied at a particular price.

Types of Supply Elasticity 

The elasticity of supply can be classified as under: 

(i) Perfectly inelastic supply:

If as a result of a change in price, the quantity supplied of a good remains unchanged, we say that the elasticity of supply is zero or the good has perfectly inelastic supply (Es = 0.). The vertical supply curve in Figure 28 shows that irrespective of price change, the quantity supplied remains unchanged. In other words, the quantity supplied is unaffected by any change in price. As the elasticity rises, the supply curve gets flatter, which shows that the quantity supplied responds more to changes in price.

(ii) Relatively less-elastic supply:

If as a result of a change in the price of a good its supply changes less than proportionately, we say that the supply of the good is relatively less elastic or elasticity of supply is less than one. In this case, the coefficient of elasticity falls in the range 0 < Es < 1. The percentage change in quantity is less than the percentage change in price. In other words, the quantity is not very responsive to price. Figure 29 shows that the relative change in the quantity supplied (∆Q) is less than the relative change in the price (∆P).

(iii) Relatively greater-elastic supply :

If elasticity of supply is greater than one i.e., when the quantity supplied of a good changes substantially in response to a small change 
in the price of the good we say that supply is relatively elastic. The percentage change in quantity is greater than the percentage change in price. The coefficient of elasticity falls in the range 1 < E < ∞.Figure 30, shows that the relative change in the quantity supplied (∆Q) is greater than the relative change in the price.

(iv) Unit-elastic:

In this case, the coefficient of elasticity is one.(Es = 1). If the relative change in the quantity supplied is exactly equal to the relative change in the price, the supply is said to be unitary elastic. The percentage change in quantity is equal to the percentage change in price. Unit elasticity is essentially a dividing line or boundary between the elastic and inelastic ranges. In Figure31, the relative change in the quantity supplied (∆Q) is equal to the relative change in the price (∆P).

(v) Perfectly elastic supply:

At the opposite extreme of zero elasticity supply is perfectly elastic. This occurs as the price elasticity of supply approaches infinity and the supply curve becomes horizontal. Elasticity of supply is said to be infinite (E = ∞)or perfectly elastic when nothing is supplied at a lower price and an infinitesimally small change in price results in an infinitely large change in quantity suppliedindicating that producers will supply any quantity demanded at that price. Figure 32 shows infinitely elastic supply.