In the previous lesson, we learned about demand and elasticity of demand. Supply is the other side of the market. While demand explains consumer behaviour, supply explains producer behaviour. This lesson covers the meaning of supply, its determinants, the law of supply, changes in supply, and elasticity of supply — all of which are frequently tested in CMA Foundation MCQs.
What is Supply?
- Supply is NOT the same as stock
- Stock = total quantity available with a seller
- Supply = portion of stock a seller is willing to sell at a particular price, in a particular market, at a particular time
- Law of supply = direct relationship between price and quantity supplied
Supply Function: Sx = f [Px, PI, T, W, GP]
| Symbol | Meaning |
|---|---|
| Sx | Supply of good x |
| Px | Price of good x |
| PI | Price of inputs / factors |
| T | Technology |
| W | Weather conditions |
| GP | Government policy |
Determinants of Supply
| Determinant | Effect on Supply |
|---|---|
| Price of the good | Price rises → supply rises (direct) |
| Goals of the firm | Profit maximisation goal → higher supply at higher prices |
| Input prices | Input prices rise → supply falls |
| Technology | Better technology → supply rises |
| Government policy | Higher taxes → supply falls; subsidies → supply rises |
| Future price expectations | Price expected to rise → current supply falls (hoarding) |
| Prices of other goods | Other goods become more profitable → supply of this good falls |
| Number of firms | More firms → market supply rises |
| Natural factors | Floods, drought, pests → supply falls |
Law of Supply
When all other things remain constant, if the price rises supply increases, and if the price falls supply decreases.
- Price and quantity supplied have a direct / proportional relationship
- Supply curve slopes upward from left to right
Supply Schedule:
| Price of x (₹) | Supply of x |
|---|---|
| 500 | 0 |
| 1000 | 10 |
| 1500 | 30 |
| 2000 | 55 |
| 2500 | 90 |
- Individual Supply Schedule → one seller
- Market Supply Schedule → all sellers added together
Exceptions to the Law of Supply
In these cases the supply curve does not slope upward:
| Exception | Curve behaviour |
|---|---|
| Land / Agricultural goods | Supply cannot change with price → curve is vertical (parallel to Y axis) |
| Rare goods | Supply cannot be increased → curve is vertical (parallel to Y axis) |
| Labour supply | Backward bending curve — supply rises initially as wages rise, but beyond a certain wage level workers prefer leisure over work so supply falls |
Change in Supply vs Change in Quantity Supplied
Another very commonly tested MCQ distinction:
| Change in Quantity Supplied | Change in Supply | |
|---|---|---|
| Cause | Change in price only | Change in any other determinant |
| Also called | Extension / Contraction | Increase / Decrease |
| On the graph | Movement along the same curve | Shift to a new curve |
| Price rises → | Extension of supply | — |
| Price falls → | Contraction of supply | — |
| Other factors improve → | — | Increase → curve shifts right |
| Other factors worsen → | — | Decrease → curve shifts left |
Elasticity of Supply (Es)
Es = Proportionate change in supply ÷ Proportionate change in price
Es = (dq/q) ÷ (dp/p) = (dq/dp) × (p/q)
5 Values of Elasticity of Supply:
| Value | Type | Meaning | Curve |
|---|---|---|---|
| Es = ∞ | Perfectly elastic | Supply changes without any price change | Horizontal (parallel to X axis) |
| Es = 0 | Perfectly inelastic | Price changes but supply stays constant | Vertical (parallel to Y axis) |
| Es > 1 | Relatively elastic | Small price change → large supply change | Flatter upward slope |
| Es < 1 | Relatively inelastic | Large price change → small supply change | Steeper upward slope |
| Es = 1 | Unitary elastic | % change in supply = % change in price | Upward slope |
Determinants of Elasticity of Supply
| Determinant | More Elastic (Es > 1) | Less Elastic (Es < 1) |
|---|---|---|
| Nature of good | Durable goods | Perishable goods |
| Time period | Long run | Short run |
| Availability of inputs | Inputs easily available | Inputs scarce |
| Cost of production | Low cost of production | High cost of production |
| Nature of inputs | Inputs freely available in market | Inputs not easily available |
| Risk taking by entrepreneur | Entrepreneur willing to take risks | Risk averse entrepreneur |
Key Concepts to Remember
- Supply ≠ Stock — supply is only what the seller is willing to offer at a given price
- Law of supply = direct relationship — price rises, supply rises
- Supply curve slopes upward — opposite to demand curve
- Exceptions: land, rare goods (vertical curve), labour (backward bending curve)
- Change in price → movement along the curve (extension / contraction)
- Change in other factors → shift of the curve (increase / decrease)
- Curve shifts right = increase in supply; curve shifts left = decrease in supply
- Perfectly elastic supply → horizontal curve; Perfectly inelastic → vertical curve
- Long run supply is more elastic than short run supply
- Perishable goods have less elastic supply; durable goods have more elastic supply
Note to Students: These notes are designed for quick revision and MCQ preparation. For detailed explanation with examples, watch our YouTube video lessons. Use these notes alongside practice questions and the full PDF for complete exam preparation.
Practice MCQs for Lesson 1.3 – Part 3
Want more practice?
Download the Full Practice PDF for more questions, better exam-level practice, and to avoid common mistakes. (This also supports the creation of more free tests like this.)
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