Law of supply, supply function and elasticity of supply

1. Supply and stock

Supply is the quantity of a commodity that sellers are willing and able to offer for sale at a given price during a given period. Stock is the total quantity available with sellers at a point of time. Supply can never exceed stock; for a perishable good (fish, vegetables) supply and stock are nearly equal, because the seller cannot hold back.

2. The law of supply

Other things being equal, the quantity supplied rises with a rise in price and falls with a fall in price. Price and quantity supplied vary directly.

Assumptions: no change in the cost of production, the technique of production, prices of other goods, the number of firms, taxes and subsidies, and producers’ expectations.

With quantity on the horizontal axis and price on the vertical, the supply curve slopes upward from left to right.

Why it slopes upward: (i) a higher price means a higher profit, so firms produce more; (ii) marginal cost rises as output expands (diminishing returns), so more is offered only at a higher price; (iii) a higher price draws new firms into the industry; (iv) sellers holding stocks release more.

3. Exceptions

• Backward-bending supply of labour. Beyond a certain wage a worker prefers leisure to more income and offers fewer hours as wages rise.
• Agricultural goods. Output depends on weather and the season; supply cannot be increased at once when price rises.
• Rare goods and antiques. Supply is fixed whatever the price.
• Expectation of a further fall in price. Sellers clear stocks even at a lower price.
• Distress sale. A seller in urgent need of cash sells more at a low price.
• Industries with falling costs. Where economies of scale reduce cost as output grows, more may be supplied at a lower price.

4. The supply function and its determinants

The supply function shows the relation between the quantity supplied and the factors that determine it:

S_x = f(P_x, P_o, C, T, G, N, E)

1. P_x, price of the good: the direct relation stated by the law.
2. P_o, prices of other goods: if the price of sugarcane rises, farmers shift land from paddy and the supply of rice falls.
3. C, cost of production: higher wages, raw-material or power costs reduce supply at every price.
4. T, technology: better technique lowers cost and increases supply.
5. G, government policy: an excise duty or GST rate increase reduces supply; a subsidy increases it.
6. N, number of firms in the industry.
7. E, expectations about future prices; also natural factors (monsoon) for farm goods, and the goal of the firm (profit or sales maximisation).

A simple linear supply function is S = −100 + 10P. At P = Rs. 20, S = 100; at P = Rs. 30, S = 200. The positive coefficient of P is the law of supply in algebraic form.

5. Change in quantity supplied and change in supply

A change in the good’s own price causes a movement along the curve: extension when price rises, contraction when it falls.

A change in any other determinant shifts the curve. Better technology or a subsidy causes an increase in supply (more at every price, curve shifts right); a rise in cost or a new tax causes a decrease (curve shifts left).

6. Elasticity of supply

e_s = percentage change in quantity supplied ÷ percentage change in price. It is positive, since price and quantity supplied move together.

Worked figure. Price of rice rises from Rs. 40 to Rs. 45 and supply from 200 to 240 quintals. % change in S = 40 / 200 = 20%; % change in P = 5 / 40 = 12.5%; e_s = 20 / 12.5 = 1.6, relatively elastic.

7. Determinants of elasticity of supply

1. Time. Marshall distinguished the market period (supply fixed, perfectly inelastic), the short period (output can be varied with the existing plant, supply somewhat elastic) and the long period (plant and the number of firms can change, supply most elastic).
2. Nature of the good: perishables are inelastic; durables, which can be stored, more elastic.
3. Behaviour of cost: if marginal cost rises sharply with output, supply is inelastic.
4. Availability of factors and spare capacity.
5. Technique: simple techniques allow a quick change in output; complex, capital-intensive ones do not.
6. Producers’ expectations and risk-taking.

8. Equilibrium price

Putting the two laws together, market price settles where quantity demanded equals quantity supplied. In the rice schedule above, if buyers demand 200 quintals at Rs. 40, that is the equilibrium. At a higher price there is excess supply and price falls; at a lower price excess demand and price rises. Marshall compared demand and supply to the two blades of a pair of scissors: neither alone cuts. This is developed in the perfect competition note in Unit IV.

How this is examined

“Write short note on law of supply” was a 6-mark question in January 2026 (80-mark paper), and “Supply function” an 8-mark short note in February 2025 (100-mark paper). A full note gives the definition, statement, assumptions, a schedule, the reasons for the upward slope and two or three exceptions; for the supply function, write the function, list the determinants and add the linear example. Elasticity of supply is the obvious next question if the examiner wants a 10-marker from this topic.