Economics: Derivation of Supply and Change in Supply

DERIVATION OF INDIVIDUAL SUPPLY CURVE

The quantities of goods supplied by an individual to the market to sell it at a different price at a certain time period are known as individual supply. Presentation of such information in a schedule is known as individual supply schedule. And graphical represent of such information is called individual supply curve. It shows the positive relation between price and quantity supplied.

Individual Supply Schedule

Above tabular presentation of a various price of a commodity and quantity supplied by suppliers at a particular time is known as individual supply schedule. In the above table, when a price of the commodity is Rs 10 per kg, quantity supplied is 100kg. Simply, as the price increases rapidly to Rs 20, 30, 40 and 50, quantity supplied also increases to 200, 300, 400 and 500kg respectively. Thus, the individual supply schedule shows, other thing remaining same quantity supplied increases with a rise in price.

The schedule can be presented in a diagram as below :

A graphical presentation of the information of the above table can be called individual supply curve. In the above figure, SS₁is the supply curve. When the price of a commodity is Rs 10 per kg, individual supply is 100kg. As the price rises the quantity, supply also increases with the rise in price. Joining all the corresponding points, we get supply curve SS₁ sloping upward to the right.

DERIVATION OF MARKET SUPPLY CURVE

Market supply is the formation of a group of individuals' supply. The tabular presentation which shows an aggregate quantity supplied of homogenous product sold by many individuals in the market at a various price and a particular time is known as market supply schedule. Presenting that information in a diagram is known as market supply curve.

Market Supply Schedule

In the given table, the last column shows the total market supply at a various price, When the price of a commodity is Rs 10 per unit, firm A supply 5 unit, firm B supply 15 units. Thus, the total market supply is 20 units. As the price rises from Rs 10 to Rs 20 and so on, the quantity supplied by individual firm also increases.

The diagram shows the market supply curve in which price and quantity are measured along X-axis and Y-axis respectively. When the market price is Rs 10 per unit, the total market supply is 20 units. When the price rise to Rs 50 per unit, the total quantity supplied in the market reach to 80 units. The curve SS₁ is the market supply curve which is sloping upward to the right and it shows the positive relation between price and quantity supplied.

CHANGE IN SUPPLY

Change in supply can be explained in the following two ways.

1.Movement along the Supply Curve

Normally, the supply curve shows the relation between the price of a commodity and the quantity supplied by a supplier. When the price rises up in the market, the quantity supplies too increases and with the fall in price in the market, the quantity supplied by a commodity decreases. Such increase and decrease in price and quantity supplied causes the movement along the supply curve from left to right and right to left.

Other things remaining same, if the price of a commodity increase, then the quantity supplied of the same commodity also increases and the curve moves from right to left, which is known as an extension of supply. On the other hand, other things remaining same, if the price of a commodity falls, then the quantity supplied of same commodity decreases and the supply curve moves from left to right, which is known as a contraction of the supply curve.

From the above table, when the price is Rs 10, then the initial quantity supplied is 15kg. Suppose, the price falls to Rs 5 then the quantity supplied decreases to 15kg, this movement is called contraction of supply. And when the price rise to Rs 15, then the quantity supplied increases to 20kg, this movement is called an extension of supply. We can learn more with the help of figure:

In the above, X-axis and Y-axis measures the price and a quantity supplied. When the price is Rs 10, quantity supply is 15kg. In this supply curve the initial equilibrium point is E. When the price falls to Rs 5, quantity supplied falls to 10kg from 15kg. Then, the equilibrium point moves to E₁ due to the contraction in supply. When the price rise to Rs 15, the quantity supplied increases to 20kg. Then, the equilibrium point moves upward to E₂ due to the extension in supply.

2. Shift in Supply Curve

Increment or decrement in total supply due to change in other determinants except the price of a commodity causes a shift in supply. The main determinants of supply are a price of related goods, new technology, the cost of production, etc. It can be explained with the help of figure:

In the above diagram, when there is fall in price, supply increases which cause a shift in supply to the right. SS is the original supply, the increase in supply makes the movement of supply curve SS to S₁S₁. On the next figure, when there is a rise in price, supply decrease and shifts supply curve to the left from SS to S₂S₂.

In both figure, the shift has been caused by factors other than a change in price. A rightward shift shows the increase in supply and leftward shift shows the decrease in supply.