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S6 Economics

The theory of Supply

SUPPLY : This is the amount of goods and services the producers are willing to produce and put on market for sale at a given price and at a given period of time. 

Quantity supplied is a desired flow i.e. it measures how much producers would like to sell and not how much they actually sell. 

Individual supply; this is the quantity of a commodity that a firm/producers are willing to sell at various prices during a given time. 

Market supply; this refers to quantities of a commodity that all producers are willing to offer for sale to a particular market at various prices during a given time. 


TYPES OF SUPPLY

1.  COMPETITIVE SUPPLY 

This  is  the  supply  of  two  or  more  commodities  that  use  the  same  resources  for  their production  such  that  an  increase  in  the  supply  of  one  product  leads  to  decline  in  the supply/production of the other. E.gs include; eggs and meat from chicken, Milk and meat from cows, crop and animal production from a piece of land etc.   

2.  JOINT/COMPLEMENTARY SUPPLY

This  refers  to  the  supply  of  two  or  more  commodities  from  the  same  process  of production/same  source  such  that  an  increase  in  supply  of  one  commodity  leads  to  an increase in supply of the other. E.g. Meat and skin from slaughtered animals, petrol, diesel and paraffin from crude oil through fractional distillation.  

3.COMPOSITE SUPPLY

This is the total supply of goods that are substitutes to one another. OR: It refers to a supply of a good or service from more than one source   E.g. the supply of mutton, beef and chicken, or supply of tea, coffee and cocoa.  

CLASSIFICATION OF SUPPLIERS

Suppliers  are  classified  according  to  the  number  of  them  in  the  market  of  a  given commodity. These include the following 

I.  Monopoly. This is a market situation where there is one supplier of a commodity which has no close substitutes. 

II.  Oligopoly. This  is  a  market  situation  where  there  are  a  few  firms  in  the  market  of  a  given product. 

III.  Perfect competition. This  is  a  market  situation  where  there  are  many  suppliers  competing  with  one another in the supply of homogeneous goods. Under perfect competition, supply of the commodity cannot be controlled. 

IV.  Monopolistic competition. This is a situation where the competition for the market is among the suppliers who through several devices make their goods artificially different. 

V.  Duopoly.  This  is  a  market  situation/an  industry/a  form  of  imperfect  competition  or  one  in which there are only two firms. 

PERIOD USED IN CONNECTION TO SUPPLY

Period refers to the time through which supply can be changed or not. There are three periods used in connection to supply namely; 

a.  Very short run period

In this period changes are not possible, no matter how high the demand for  the commodity is.  

b.  Short run period

In this period, quantity supplied can be increased but it isn’t possible to change the methods of production e.g. it is not easy to change from a hoe to a tractor in such a period.

c.  Long run period

In this period the producer is able to change the methods of production so as to change the quantity supplied e.g.  changing from a hoe to a tractor to increase supply. 

THE SUPPLY FUNCTION

This is a statement which shows a technical relationshionship between quantity supplied and the major determinants of quantity supplied. It is summarised as follows: 

THE SUPPLY SCHEDULE: 

This is a table showing the quantity supplied of a commodity at various price levels over a period of time. It explains the law of supply which states that “the higher the price, the higher the quantity supplied of a commodity and the lower the price, the lower the quantity supplied of a commodity  “ceteris paribus”/other factor being constant. 

THE SUPPLY CURVE 

This is a locus of points showing the quantity of a commodity supplied at  different  price levels in a given period of time i.e. it is a graphical representation of the supply schedule.

A supply curve slopes upwards from left to right indicating that more of a commodity  indicating that more of a commodity is supplied at a higher price and less is supplied at  a lower price. 

  An illustration of the supply curve: 

THE SLOPE OF THE SUPPLY CURVE

The supply curve is positively sloped i.e. it slopes from left to right showing the direct relationship between the price and quantity supplied of a commodity. The positive slope is explained by the following factors.  

1.  Entry of new firms in the industry When the price of a commodity increases, new  firms are attracted to enter in the industry in order to enjoy the prospects of increasing profits, this leads to an increase in supply as price increases. 

2.  Profit motive As  producers  aim  at  maximizing  profits,  they  supply  more  at  higher  prices  in  order  to  increase  the profitability of the business. A fall in price of the commodity reduces the quantity supplied because it is no longer profitable for them to sell more at lower prices.  

3.  The struggle to maintain equilibrium in free market conditions As demand increases, price increases as well. Due to shortage, firms increase output in order to cover the shortage. 

4.  Ease of diverting resources from the production of a commodity whose price has reduced to the production of a commodity whose price has increased. For example, when the price of groundnuts increases, keeping the price of beans  constant, producers easily divert  resources i.e. land, labour,  and capital, from production of beans to production of groundnuts. This leads to an increase in the supply of groundnuts as the price increases since producers expect higher profits.  

ABNORMAL CURVES/REGRESSIVE/EXCEPTIONAL SUPPLY CURVES

These are curves that do not obey/conform to the law of supply such that more of a commodity may be supplied at lower price or less of a commodity may be supplied at a higher price. There  are two types of  regressive supply  curves  namely: backward bending/slopping supply curve of labour and fixed supply.

1.   An illustration of the backward bending/ slopping supply curve of labour: 

Causes of a backward slopping supply curve of labour

i.  When  labour  has  a  strong  preference  for  leisure  due  to  accumulated  incomes.  Such  a worker may prefer to work for less hours and spend most of the time enjoying leisure, even when the wage increases. 

ii.  The presence of target workers i.e. some individuals get employed with certain aims or targets within their minds and once they have achieved them, they offer less hours of work even when the wage has increased. 

iii.  Increased levels of progressive taxation because the harder the person works, the higher the amount of tax paid and therefore such a worker decides to work for less hours. 

iv.  When there is political instability in an area.

v.  Reduction in real incomes due to high rates of inflation

vi.   Poor  health  of  workers.  This  is  common  in  ageing  population  where  people  need enough time to rest.

vii.   Poor conditions of work and poor relation between workers and management at work places.  

 

2.  Fixed supply curve 

This is a situation where an increase in the price of a commodity does not have any effect on quantity supplied at all levels of price.   

An illustration of a fixed supply curve

Other situations that explain the regressive supply curve:

i.  Speculative supply    

When prices increase and they are expected to increase further, sellers put less on the market, since they expect to get a lot more profits in the near future. 

ii.  Seasonal factors

For perishable commodities, more is put on the market immediately after harvesting even if prices  are  low.  More  is  put  on  the  market  because  such  goods  cannot  be  stored  after harvesting.

Also in periods of catastrophe e.g. wars, draught, etc even if the prices are increasing, supply of the products will not increase. 

 

FACTORS THAT AFFECT/ INFLUENCE/DETERMINE/ SUPPLY: 

These  factors  are  responsible  for  the  changes  in  the  amount  of  goods  supplied.  More  of  it  is supplied when the factors are favourable and less is supplied when they are not favourable. The factors include; 

1.  The  price  of  a  commodity;  high  price  of  a  commodity  leads  to  high  supply  of  a commodity, this is so because  higher prices mean greater profits and so firms  are attracted to supply high quantity of the commodity. On other hand low price of a commodity leads to low supply because of the low profits earned which discourages production hence low supply. 

2.  Price of a jointly supplied good. High price of a jointly supplied good leads to high supply of the commodity in question, this is so because the high price of the jointly supplied good leads  to  high  quantity  supplied  of  that  commodity  which  leads  to  high  supply  of  the commodity  in  question  since  they  are  both  supplied  from  the  same  source/process  of production.  On  other  low  price  of  a  jointly  supplied  good  leads  to  low  supply  of  the commodity in question, this is so because the low price of the jointly supplied goods leads to low quantity supplied of that commodity which leads to low supply of the commodity in question because they are both supplied from the same source/ process of production 

3.   Price  of  a  competitively  supplied  commodity/good.  High  price  of  a  competitively supplied good leads to low supply of the commodity in question; this is so because the high price  of  the  competitively  supplied  good  leads  to  high  supply  of  it  which  leads  to  low supply  of  the  commodity  in  question  because  they  use  the  same  resource  for  their production.  On  the  other  hand  low  price  of  a  competitively  supplied  good  leads  to  high supply of the commodity in question, this is so because the low price of the competitively supplied  good  leads  low  supply  of  it  which  leads  to  high  supply  of  the  commodity  in question because they use the resource for their production. 

4.  The cost of production; high cost of production leads to low supply of a commodity, this is so because the low profit margin enjoyed by the producers. On the other hand low cost of production leads to  high supply of a commodity, this is so because of  the high profit margin enjoyed by the producers 

5.  The level / state of technology;   the use of advanced techniques /methods   of production leads to high  output/supply of a given commodity, this is so because of the high level of efficiency in production. On the other hand use of poor/ primitive/rudimentary techniques of production leads to low output/supply of a commodity , this is so because of the low level of efficiency in  production.  

6.  The  goal/objective  of  the  producer;  A  producer  whose  aim  is  profit  maximisation produces low output, this is so because he/she wants to wants to restrict output and sell a at high profit per unit sold. On the other hand a producer whose aim is sales maximisation produces high quantity of output; this is so because he wants to make profits by maximising sales.   

7.  Government policy on production of the commodity; Favourable government policy on production of a commodity in term of low taxes imposed on a commodity leads to high supply of a given commodity, this is so because it leads to low cost of production which implies high profits. On the other hand unfavourable government policy on production in terms of high taxes leads to low supply of a given commodity’s this is so because it leads to high cost of production which implies low profits. 

8.  The gestation period of a commodity. A long gestation period leads to low supply of a given  commodity,  this  so  because  it  take  a  long  time  to  produce  and  supply  such  a commodity.  On  other  hand  a  short  gestation  period  leads  to  high  supply  of  a  given commodity since it takes a short period to produce and supply such a commodity.  

9.  Number of producers/ suppliers in the market;  A large number of producers leads to a high supply of a good, this is so because supply is from many producers, However a small number of producers leads to a low supply of a good since there are few producers to supply the commodity.  

10. Natural conditions/ factors. Favourable natural factors lead to high supply of especially agricultural  products;  this  is  so  because  it  favours  the  production  of  such  products. However unfavourable natural conditions lead to low supply of especially of agricultural products because they discourage/limit their production. 

11. The  political  climate/  atmosphere;  Political  stability  leads  to  high  supply  of  a  given commodity, this is so because peace and stability enables people to engage in production of  goods  since  they  are  not  scared  of  losing  their  lives  and  property.  However  political instability  leads  to  low  supply  of  goods,  this  is  so  because  it  discourages  production  of goods, since people are scared of losing their lives and property.  

12. The market size/ demand for the commodity. A large market size leads to high supply of a commodity; this is so because large market implies high profit margins thus motivating them  to  produce  high  output  levels.  On  the  other  hand  a  small market  size  leads  to  low supply  of  a  commodity  because  a  small  market  size  leads  to  low  profit  margins  hence discouraging production. 

13. Level of entrepreneurial skills. Presence of good entrepreneur skills leads to high supply of a commodity because they are many people to initiate businesses and sustain them.  On the other hand low level of entrepreneurial skills leads to low supply of a commodity, this is so because there are few people to initiate businesses and sustain them. 

14. Terms  of  service/  working  conditions.  Favourable  terms  of  service  like  good  working conditions, prestige of work  lead to high supply of a given commodity, this is so because it  motives  workers  to  work  hard  leading  to  high  output  levels.  On  the  other  hand  poor working  conditions  lead  to  low  supply  of  a  given  commodity,  this  is  so  because  it discourages workers to work hard thus leading to low output levels. 

15. The land tenure system. A favourable land tenure system promotes production leading to high supply of a given good; this is so because producers have easy access to land leading to  high  production  levels.  On  the  other  hand  poor  land  tenure  system  discourages production leading to low supply of a given good, this is so  because of the difficulty in accessing land thus leading to low production levels.

 

Factors that lead to high supply of a commodity: 

  • High price of the commodity
  • High price of a jointly supplied good
  • Low price a competitively supplied good
  • Low cost of production
  • Advanced/High state of technology
  • The goal of the producer being sales revenue maximisation
  • Favourable government policy on production of a commodity
  • Short gestation period
  • Large number of producers
  • Favourable natural factors
  • Political stability/Favourable political climate/atmosphere
  • A large market size  
  • High level of entrepreneurial skills
  • Favourable terms of service/Good working conditions
  • Favourable land tenure system 

 

Factors that lead low supply of a commodity: 

  • Low price of the commodity
  • Low price of a jointly supplied good
  • High price of a competitively supplied good
  • High cost of production  
  • Poor state of technology
  • The goal of the produce being profit maximisation
  • Unfavourable government policy on production
  • Long gestation
  • Small number of producers
  • Unfavourable natural factors/conditions
  • Political instability/Unfavourable political climate/atmosphere
  • A small market size. 
  • Limited/low levels of entrepreneurial skills
  • Poor terms of service/Poor working conditions
  • Poor land tenure system 

 

 CHANGE IN QUANTTITY SUPPLIED

This  refers  to  an  increase  or  decrease  in  the  quantity  supplied  of  a  commodity  due  to  the change in the price of a commodity, when other factors that affect supply remain constant. Change in quantity supplied is illustrated by movement along the same supply curve, either upward or downwards  

A graph illustrating change in quantity supplied  

In  the  graph  above,  the  downward  movement  along  the  same  supply  curve  indicates  a contraction in supply/ decrease in quantity supplied.i.e. (A to B). This is due to a fall in price from OPo  to OP1, indicating a decrease in quantity supplied from OQo  to OQ1.  

Decrease in quantity supplied is a situation when less of a commodity is supplied due to a decrease  in  the  price  of  the  commodity,  when  other  factors  that  affect  supply  are  held constant.

The  upward  movement  along the  same  supply  curve  indicates  an  extension  in  supply/an increase in the quantity supplied. i.e.( A to C). This  is due to an increase in price from OPo to OP2 indicating an increase in quantity supplied from OQo to OQ2.  

An increase in quantity supplied is a situation when more of a commodity is supplied due to  an  increase  in  the  price  of  a  commodity,  when  other  factors  that  affect  supply  remain constant.      

 

CHANGE IN SUPPLY 

This refers to an increase or a decrease in quantity supplied of a commodity due to changes in the other factors that affect supply when the price of the commodity is constant.  

A graph illustrating change in supply 

At each possible price(OP0)in the graph  above, quantity supplied can increase or decrease because of changes in other factors affecting the quantity supplied. Increase in supply illustrated by the shift of the supply curve to the right i.e. SoSo  to S1S1. Quantity supplied increases from OQ0 to OQ1 at a constant price OP0.

 

FACTORS THAT CAUSE A CHANGE IN SUPPLY OF A COMMODITY:  

Change  in  the  price  of  a  jointly  supplied  good.  An  increase  in  the  price  of  a  jointly supplied  good  leads  to  an  increase  in  supply  of  the  commodity  in  question,  this  is  so because  an  increased  price  of  the  jointly  supplied  good  leads  to  an  increased  quantity supplied  of  that  commodity  which  leads  to  an  increase  in  supply  of  the  commodity  in question since they are both supplied from the same source/process of production. On other  a  decrease  in  the  price  of  a  jointly  supplied  good  leads  to  a  decrease  in  supply  of  the commodity in question, this is so because the reduced price of the jointly supplied goods leads to a decrease in  quantity supplied of that commodity which leads to  a fall in  supply of the commodity in question because they are both supplied from the same source/ process of production 

Change in the price of a competitively supplied commodity/good. An increase in the  price of a competitively supplied good leads to  a decrease in supply of the commodity in question; this is so because the increased price of the competitively supplied good leads to increased supply of it which leads to a decrease in  supply of the commodity in question because they use the same resource for their production. On the other hand a decrease in the price of a competitively supplied good leads to an increase in supply of the commodity in question, this is so because the reduced price of the competitively supplied good leads reduced supply of it which leads to increased supply of the commodity in question because they use the resource for their production.  

Change in the cost of production; an increase in the cost of production leads to a decrease in supply of a given commodity, this is so because the reduced profit margin enjoyed by the producers. On the other hand reduced cost of production leads to an increase in supply of  a  given  commodity,  this  is  so  because  of  the  increased  profit  margin  enjoyed  by  the producers. 

Change in the level / state of technology; Improvement in the techniques /methods   of production leads to increased output, this is so because of the increased level of efficiency in production. On the other hand decline in the state of techniques of production leads to a decrease in supply, this is so because of the reduced level of efficiency in production.

Change in the goal/objective of the producer; A change in the goal of the producer from sales revenue maximisation to profit maximisation leads to decrease in supply of a given commodity, this is so because  the producers want to fewer out so as to charge an increased price per unit sold, On the other hand the change in the goal of the producer from profit maximisation  to  sales  revenue  maximisation  leads  to  an  increase  in  supply  of  given commodity  because producers want to  increase sales by charging reduced prices.  

Change in government policy on production of the commodity; Favourable change in government policy on production of a commodity in term of reduced taxes imposed on a commodity leads to an increase in supply in supply of a given commodity; this is so because it leads to reduced costs of production which leads to increased profits. On the other hand unfavourable change in government policy on production in terms of increased taxes leads to a reduction in supply of a given commodity, this is so because it leads to increased costs of production which leads to reduced profits. 

Change  in  the  number  of  producers/  suppliers  in  the  market; An  increase  in  the number  of  the  producers  leads  to  an  increase  in  the  supply  of  a  given  good,  this  is  so because  of  increased  number  of  producers  for  a  given  good.  However  a  decrease  in  the number of producers, leads to decline in supply of a given good, this is so because of the reduced number of producers for that good. 

Change in the natural conditions/ factors. Favourable change in natural factors lead to an increase in supply of a given good especially agricultural products; this is so because it favours increased production of such products. However unfavourable change in natural conditions lead to a decline in supply of especially of agricultural products because they discourage/limit increased production of such a good.

Change  in  the  political  climate/  atmosphere;  Favourable  change  in  Political    climate  leads  to  increased    supply  of  a  given  commodity,  this  is  so  because  peace  and  stability enables people to engage increased production of a given good  since they are not scared of  losing  their  lives  and  property.  However  unfavourable  change  in  political  leads  to reduced supply of a given good, this is so because it discourages increased production of a given good, since people are scared of losing their lives and property.

Change in the market size/ demand for the commodity.  A reduction in the market size leads to a reduction in supply of a given commodity; this is so because it reduces the profit margins  thus  discouraging producers  to  increase output levels.  On  the  other  hand  an increase  in  the  market  size  leads  to  an  increase  in  supply  of  a  commodity because  the increased market size leads to reduced profit margins hence discouraging producers from increasing output.

Change  in  the  level  of  entrepreneurial  skills.  Improved/increased  level  of entrepreneurship  leads  to  increased  supply  of  a  given  commodity,  this  is  so  because  of increased ability to initiate businesses and sustain them. However a decline in the level of entrepreneurship  leads to a decrease in the supply of a given commodity, this is so because of the reduced ability to initiate businesses and sustain them.

Change in the terms of service/ working conditions. Improved term of service leads to increased supply of a given commodity, this is so because of the increased motivation of the  workers,  On  the  other  hand  decline  in  the  terms  of  service  leads  to  a  decline  in  the supply  of  a  given  commodity  since  the  workers  are  discouraged  by  the  poor  working conditions.

Change in the land tenure system. An improvement in the land   tenure system promotes production leading to an increase in supply of a given good; this is so because producers have easy access to land leading to increased production levels. On the other unfavourable change in the land tenure system discourages production leading to a decrease in supply of a given good, this is so because of the difficulty in accessing land thus leading to reduced production levels. 

 

An increase in the supply of a commodity

This is a situation when more of a commodity is supplied due to favourable changes in other factors that affect supply when price is constant. It involves a shift of the supply curve to the right.      

An illustration of an increase of a commodity. 

From the above illustration an increase in supply is indicated by the shift of the supply curve from S1S1 to S2S2, leading to an increase in supply from OQ1 to OQ2. 

 Factors that lead to an increase in supply of a commodity 

  • Natural factors becoming favourable
  • An improvement in techniques of production.
  • A fall/reduction in the cost of production.
  • An increase in the number of suppliers in the industry.
  • An increase in the market size./ An increase in the demand for the commodity.
  • Reduction in the gestation period for a commodity.
  • Change  in  the  goal  of  the  firm/producer  from  profit  maximization  to  sales revenue maximisation.
  • Favourable government policy on production of a commodity e.g. reduced taxes/ Increased subsidisation.
  • An improvement in the political climate.
  • An improvement in the entrepreneurial skills
  • An improvement in the land tenure system.
  • An improvement in terms of service./ working conditions
  • An improvement in the state of  infrastructure/ distribution system
  • An increase in the price of the jointly supplied good
  • A decrease in the price of a competitively supplied good 

 

Decrease in supply

This refers to a situation when less of a commodity is supplied due to unfavourable changes in other factors that affect supply when price is constant. It is indicated by a shift of the supply curve to the left.

An illustration of the decrease in supply. 

Factors that lead to a decrease in supply of a commodity. 

  • An increase in the cost of production
  • Natural factors/conditions becoming unfavourable
  • A decline in the level of technology./methods of production
  • A reduction in the number of suppliers/producers in an industry/Exit of some firms from the industry.
  • Political atmosphere/ climate becoming unfavourable
  • A decrease in the market size/ a decrease in the demand for a commodity  
  • Change  in  the  goal  of  a  firm/producer  from  sales  revenue  maximization  to  profit maximization.
  • Government  policy  on  the  production  of  the  commodity  becoming  unfavourable  e.g. increased taxes/reduced subsidies.
  • A fall in the entrepreneurial skills/ability
  • Worsening terms of service/ Decline in the working conditions. 
  • Breakdown of infrastructures
  • Decrease in the price a jointly supplied product
  • Increase in the price of a competitively supplied commodity.
  • Decrease in the supply of factor inputs e.g. capital, raw materials etc 

Discussion

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