Theory of Supply and Derivation of Single Producer's Supply Curve

Meaning of Supply

Supply like demand is also the function of price. It is expressed as, s = f(p). When the price of a commodity changes, the supply of the commodity changes. But unlike demand, supply varies directly with price. The supply has positive relationship with price. It implies that supply increases with increase in price and supply decreases with decrease in price. The supply is the quantity that a seller is willing to sell at particular price and particular time. According to Watson and Getz, “In economics, the word supply always means a schedule – a schedule of possible prices and of amounts that would be sold at each price.”
According to R. G. Lipsey, “The amount of commodity that firm are willing to offer for sale is called the quantity supplied of the commodity.”
The concept of supply curve is relevant only in perfect competitive market. The nation of supply curve is not applicable in other forms of market like monopoly, monopolistic competition. Because, the main task of a supply curve is to show how much a firm can supply at given price. In perfect competition, a firm is only a price-taker and quantity adjuster. It cannot influence price. In the imperfectly competitive markets, a firm determines the price of its product. It is not necessary to adjust supply at given price.

Derivation of Single Producer’s Supply Curve

The quantity supplied by a firm, other things remaining equal, changes directly with change in price of commodity. The supply increases with increase in price and the supply decreases with decrease in price. This tendency is expressed as s = f(p). It shows that the supply of a commodity depends on its price. This tendency is called the Law of Supply. When price of commodity is high, more profit can be earned. This induces firms to produce and sell more quantity. The supply of a firm is called individual supply.

The individual supply schedule is a schedule of prices of commodity and the supply of the commodity made by an individual firm. Similarly, an individual supply curve is a schedule of different quantity of goods supplied by an individual firm at different prices. The supply schedule, therefore, shows the relationship between the prices of a commodity and the quantity supplied. The individual producer’s supply schedule has been presented in table below.

Individual Supply Schedule
Price ($ per kg)
Quantity Supplied (kg. per month)
2
4
6
8
10
12
1
10
20
30
35
37
As shown in the table, the quantity supplied at price $2 per kg is 1kg, at $4 is 10kg, at $6 is 20kg, at $8 is 30kg and so on. It shows that quantity supplied increases with increase in price.

A market supply curve is derived by the horizontal summation of the supply curves of all individual sellers in the market. The individual firm’s supply curve SS has been derived in the following figure on the basis of above table.
Individual Supply Curve
In the figure, OX axis represents quantity supplied and OY axis represents price of sugar. SS is the supply curve. It shows that the quantity supplied increases with increase in price. The quantity supplied is 1kg at price $2, 10kg at $4, 20kg at $6, 30kg at $8, 35kg at $10 and so on. In this way, the supply curve shows the relationship between price of the commodity and the quantity supplied.

In general, the supply curve has positive slope or it slopes upwards to the right. This implies that a firm supplies more at higher price. Because, at low price only the efficient producers can produce hand make profit. But at high price, even the firms previously unable to compete begin to supply and earn profit. Moreover, previously existing firms may be able to expand output at high price. In general, higher prices are needed to provide an incentive for firms to produce more.

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