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Supply Function

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What is Supply Function? 

Supply function is a mathematical description of the connection between the quantity required of a service or product, its value and other associated factors such as input costs and related goods prices. A supply function has many independent variables and a single dependent variable. A supply equation can be formulated by examining the relationship between the supply and the independent variables. It can also be formulated by defining whether the relationship is positively-or negatively related. For example, in general, the market price and supply are inversely correlated. On the other hand, supply and technological development are positively correlated; for example, better technology indicates added supply. 

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Law of Supply 

There is a close connection between the Price of assets and its quantity offered for sale over a particularised period. When the value of goods increases, its quantity given for sale increases and when the Price falls, the amount available for sale diminishes. This relationship between Price and quantities, suppliers are equipped to offer for sale is called the law of supply. We can better illustrate the law of supply in the form of the given equation:

TxS = Φ (Kx Tech, Si, Fn, X,........)

Here:

TxS = Quantity supplied of commodity x by the producers. 

Φ = Function of. 

Kx = Commodity Price x.

Tech = Technology. 

S = Inputs Supplies.

F = Features of nature.

X = Taxes/Subsidies.


Supply Function in Economics

The supply function in economics is applied to access how much of a given product requires to supply for a provided good price. It is used in conjunction with the demand function to circumscribe equilibrium pricing for various markets and products. Supply functions in Economics can be calculated in the following steps : 

  • Defining the price of goods correlated to the product whose supply function is to be calculated.

  • Finding out how many producers or suppliers of the given good are there.

  • Determining the function based on how the assigned quantities would influence the supply of a product.

Assumptions of Supply Function

  • Nature of Goods: 

If the assets are perishable and the seller cannot anticipate the price rise. Seller may have to give all of his goods at the current market price because he may not jeopardise getting his belongings perished.

  • Government Policies: 

Government may reinforce the producers and firms to offer products at the regular market price. In such a condition the producer may not be able to wait for the price rise. 

  • Alternative Products: 

If a number of alternative commodities are obtainable in the market and customers manage to buy those products to fulfil their requirements, the producer will have to move to convert his sources to the production of those products.

  •  Squeeze in Profit: 

Production costs like raw materials, overhead costs, labour expenses and selling may increase along with the rise in cost. Such situations may not allow the producer to offer his commodities at a profit

Determinants of Supply

Some factors can impact a producer’s readiness to supply the commodity in the market. These factors are :

  • Commodity Price: 

Any producers’ primary goal is to maximise the increase in profit. That is why producers manage to supply more products in the market when the product’s price increases, with all other constituents being constant. In the same process, producers supply fewer goods when the prices drop, and different factors remain constant.

  • Related Goods Price: 

Related goods belong to the goods utilised as input for the production of particular materials. The cost of such goods is one of the important determinants of the supply of products. It is a direct equivalent to the cost of production of any commodity. For example: when the price of similar goods rise up, the production value of the goods also increases and when the price of similar goods decline, production cost also decreases. Producers tend to withdraw their investment from products that cost more to produce, directly affecting the market’s commodity supply.

  • Price of the Production Factors: 

The production factor refers to the input needed to produce a product economically. Usually, land, labour, capital, and entrepreneurship are considered as the factors of production. Producers have to pay a specific amount in terms of wage, rent and interest in the return of using factors of production. 

  • The Goal of Producers: 

The primary objective of every firm is to earn revenue and maximise profit. Companies who prioritise prestige to profit may enhance the supply of the products in the market even when they earn very limited or no profit, just to fit out in the business.

  • Technology: 

Technology is one of the important elements of industries and firms. Improvement in technology has a great influence on the production rate. 

FAQ (Frequently Asked Questions)

Q1. Define the Law of Supply.

Ans: The law of supply or supply function is based on a changing amount of materials available to satisfy a specific demand.  It states that a higher price will cause producers to supply a higher quantity to the market. Supply is an output of economic activity.  It can be applied to measure demand—oversupply results in loss of producers. For example : 


If ten people want to buy a phone, and there is only one phone, then the trade will be based on the level of demand for the phone. The supply function requires more phones, which produces more production to match demand.

Q2. Explain Why the Rates of Agricultural Commodities are Volatile.

Ans: The rates of agricultural commodities are volatile because of the inelasticity of supply and demand. People start ordering more just because the price is less. Farmers still have to trade off their Agri products at any price (perishable goods). If crops fail, farmers have nothing to trade, and the farmers will suffer income loss. However, even when there are bumper crops, farmers' income still reduces, and the farmers suffer in both cases. This all means that irrespective of the supply being less or more, the perishability component of agricultural commodities inserts inherent volatility to the rates of these commodities.