Concept of Supply Function and Its Types

What do you mean by supply?

The economy is composed of two forces – the producers (who produce goods and services) and the consumers (who buy the products available in the market).

Supply is a fundamental concept of economics which can be defined as the total amount of a particular good or service which is available to the consumers at the existing market. It is the quantity of goods that the producers are able to or willing to offer for sale at given price. In simple words, supply is the amount of specific goods available at a specific price at a specific time.

Determinants of Supply

There are a number of factors and circumstances which can influence a producer’s willingness to supply the commodity in the market. These factors are

Price of the commodity

Any producers’ primary motive is to maximize profit or increase revenue. That is why producers tend to supply more products in the market when the price of the product rises, with all other factors being constant. In the same way, producers tend to supply fewer products in cases when the price falls and other factors remain constant.

Price of the related goods

Related goods refer to the goods which are used as input for the production of the commodity.

The price of such goods is one of the major determinants of supply of the commodity. It is directly proportional with the price of production of any commodity, i.e. when the price of related good rise up, the production cost of the commodity also rises and when the price of related goods fall, production cost also falls.

Producers tend to withdraw their investment from commodities which cost more to produce, directly affecting the supply of the commodity in the market.

Price of the factors of production

The factor of production refers to the input that is required for producing a product in an economical way. Generally, land, labor, capital and entrepreneurship are considered as the factors of production.

Producers have to pay a certain amount in terms of rent, wage and interest in the return of using factors of production. When these prices rise up, producers may want to divert their investment (resources, time and money) in the production of other commodities. As a result, the supply of the product in the market decreases.

Goal of producers

The primary objective of every firm is to earn revenue and maximize profit. However, there may be circumstances when firms focus on earning prestige rather than profit.

Companies who prioritize prestige to profit may sometimes increase the supply of the commodity in the market even in times when they earn very little or no profit at all, just to stand out in the market.

State of technology

Technology is one of the major components of firms and industries these days. Advancement in technology has a great impact on the production rate. It increases the production rate efficiently, and with an increase in the amount of products produced, there will be an increase in the supply of the commodity in the market.

Miscellaneous factors

Under this heading, we can include factors such as means of transportation and communication, natural factors, taxation policy, expectations, agreement among the producers, etc. All these factors have potential to influence the ability or willingness of producers to offer the product in the market.

What is supply function?

The functional relationship between the quantity of commodities supplied and various determinants are known as supply function. It is the mathematical expression of the relationship between supply and factors that affect the ability and willingness of the producer to offer the product. The relationship may exist between two or more number of variables.

Mathematically, a supply function can be expressed as

Qs = f(P; Prg) where,

Qs = Quantity of commodity supplied

P = Price of the good

Prg = Price of related good

Types of Supply Function

Individual Supply Function

The algebraic expression of an individual supply schedule is called individual supply function. An individual supply schedule is a tabular statement representing the various amounts of a commodity that a single producer is willing to sell at a different price, during a given period of time.

Individual supply schedule
Price of milk per liter (in Rs.) Quantity supplied per day in liters (*1000)
10 10
12 13
14 20
16 25

Mathematically, a supply function can be represented as

Sx = f(Px, Po, Pf, St, T, G) where,

Sx = Supply of the commodity x

Px = Price of the commodity x

Prg = Price of related goods

Pf = Price of factors of production

St = State of technology

T = Taxation policy

G = Goals of the firm

Market Supply Function

Market supply function is the algebraic expression of the market supply schedule. Market supply schedule can be defined as the tabular statement which represents various amounts of a commodity that the entire producers in the whole economy are willing to supply at the optimal price, at any given time.

Market supply schedule
Price of the product X per unit (in Rs.) Individual supply per day Market supply per day
100 750 500 450 1700
200 800 650 500 1950
300 900 750 650 2300
400 1000 900 700 2600

Market supply function can also be defined as the summation of individual supply functions within a specific market.

Mathematically, a market supply function can be represented as

Sx = f(Px, Po, Pf, St, T, G, N, F, M) where,

Sx = Market supply of the commodity x

Px = Price of the commodity x

Prg = Price of related goods

Pf = Price of factors of production

St = State of technology

T = Taxation policy

G = Goals of the market

N = Number of firms

F = Future expectation regarding price of the commodity x

M = Means of transportation and communication