Derivation of Market Supply Curve
The sum of quantity supplied by all firms in the market at given price is called market supply. When this process is repeated at all prices, we find the total supply of all firms. The derivation of total supply is shown in the table below.
Individual and Market Supply Schedule
Price ($ per kg)
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Supply of A (kg per month)
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Supply of B (kg per month)
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Supply of C (kg per month)
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Market Supply (kg per month)
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2
4
6
8
10
12
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1
10
20
30
35
37
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1
20
30
35
40
42
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3
15
25
35
40
41
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5
45
75
100
115
120
|
The supply schedule shows the quantity supplied by the producers at different prices. When price per kg is $2, the market supply is 5kg, when price is $4, the market supply is 45kg, when price is $6, market supply is 75kg and so on. This implies that the quantity supplied increase with increase in price.
The market supply curve SS is derived on the basis of the above supply schedule. The market supply curve SS is derived by joining each price-quantity points.
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| Market Supply Curve |
The market supply curve SS also shows that quantity supplied is 5kg at $2, 45kg at $4, 75kg at $6 and so on.
According to R. G. Lipsey, “The supply curve of a commodity shows the price of the commodity and the quantity that the supplier is willing to supply at each time period.” This curve is drawn on the assumption that all the factors affecting supply are assumed to be constant. The market supply curve is also upward sloping or slopes upwards to the right. It implies that the producers are willing to supply more at high prices.
Shift in the Supply Curve
The shift in the supply curve means that at each price more is supplied than before. The increase in supply at each price has been shown in table below. Likewise, the shift in supply curve has been shown in table and figure below:
Two Alternative Supply Schedule
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Original quantity supplied (units per month)
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New quantity supplied (units per month)
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It is seen in the table that more is supplied than before at the same price. As for instance, when price of sugar is $2 per kg, supply is 28kg, at $4, supply is 76kg, at $6, and supply is 102kg and so on.
When supply increases at each price, the supply curve shifts to the right from S1 to S2 as shown in figure. The supply may increase due to improvement in technology, fall in the price of other commodities, fall in the prices of factors of production, and change in the objective of producers.
Likewise, when the supply decreases at each price, the supply curve shifts to the left from S1 to S2 as shown in figure. The supply may decrease due to the end of technical knowledge, rise in the price of other goods, increase in the prices of factors of production, change in the objective of producers. As in demand curve, the change in the price of the commodity alone leads to movement along the same supply curve. This supply curve shifts due to the change in factors other than price of the commodity.
Factors Causing the Shift in Supply Curve
The quantity supplied depends on different factors. The change in price of a commodity alone leads to the movement along the same supply curve. But the change in the factors other than price leads to the shift in the supply curve. The factors causing shift in the supply curve can be explained as follows:
1. Price of factors of production
The production cost depends on the prices of factors of production. When the price of a factor of production increases, the cost of production of the commodities using more of that factor increases more. On the other hand, the cost of production of the commodities using less of that factor increases less. As for example, when the price of land increases, the cost of producing wheat increases more. But it has less effect on the cost of producing motorcar.
When the price of a factor changes, the relative profitability of different types of products also changes. Due to this the producers stop one type of production and start another type of production. On account of this, the quantity supplied of different commodities also change. In brief, the supply of a commodity decreases with increase in the process of production. A reduction in input prices induces firms to supply more output at each price, shifting the supply curve to the right. On the contrary, higher input prices makes production less attractive and shift the supply curve to the left.
2. Price of other commodities
The supply of a commodity is also affected by the prices of other commodities. If the price of a commodity increases and that of other commodities do not increase, in general, the production of that commodity relative to other commodities becomes less attractive. Hence, other things remaining the same, the supply of a commodity decreases when the price of other commodities rise. On the contrary, the supply of a commodity increases when the price of other commodities fall.
3. Goals of firms
Every firm has definite objectives. The objectives of a firm also affect the supply of a commodity. In general, if the objective of the firm is profit maximization, less quantity is supplied at higher price. On the contrary, if the objective is sales maximization, the firm supplies more at lower price. In traditional economics, it is generally assumed that the firms aim to maximize profit. At present some economists are of opinion that the firms have other objectives such as sales maximization objective has not declined.
4. State of technology
The state of technology is also an important determinant of supply. The improved technique of production has significantly increased the production in recent days. The improvement in the technique of production has been facilitated by the progress of science. The development of technology has affected the production and brought change in the supply of commodities. Hence, whenever there are changes in state of technology, the existing commodities are supplied more. Besides, the new commodities are also supplied. This will shift the supply curve to the right. In the long run, the change in technology causes change in cost and affects the supply of a commodity.
5. Effects of taxation
The taxation raises the prices of commodities. The imposition of tax on commodities leads to an increase in cost of production. This will generally result in a decrease in supply. A reduction of taxation will have the opposite effect.
6. Government Regulation
The government regulation also affects the quantity supplied of a commodity at each price. The most stringent safety regulations may prevent producers using the most productive process. Because, it is quite dangerous to workers. The anti-pollution devise raise the cost of production. The environmental regulation may make it unprofitable for firms to extract surface mineral deposits. “Whenever government regulations prevent producers from selecting the production method, they would otherwise have chosen, the effect of these regulations is to shift the supply curve to the left.” It has the effect of reducing quantity supplied at each price.
In addition to these factors, bad weather, strike, cost of transport and communication, time needed for the product also effect the supply of a commodity. In the short run, the price expectation of sellers may also affect the supply of a commodity.
