THE THEORY OF SUPPLY
Definition of Supply
Individual supply refers to the quantity of a given commodity that a producer is willing and able to
sell at a given price over a specific time period. Market supply refers to horizontal summation of
individual producers/firms supply in the market. The supply schedule and the supply curve
demonstrate the relationship between market prices and quantities that suppliers are willing to offer
for sale. Supply differs from “existing stock” or the amount available because it is concerned with
amounts actually brought to the market. The basic law of supply states that, “a greater quantity will
be supplied at a higher price than at a lower price”. An individual producer’s supply schedule shows
alternative quantities of a given commodity that a producer is willing and able to sell various
alternative prices for that commodity ceteris paribus (other things remaining constant).
Supply schedule for commodity X
Price per unit in Kshs Quantity supplied each week in units
30 500
31 550
32 600
33 650
34 675
35 700
36 725
This can be represented by the use of a graph referred to as a supply curve as shown in the graph
below
7
36
35
Price X
34
33
32
31
500 550 600 650 700 750
800
Quantity X
1
, A supply curve shows the relationship between the price of the commodity and the quantity
supplied. The relationship is a direct one as the supply curve slopes upwards from left to right.
The direct relationship is a graphical representation of the law of supply which states that other
things remaining constant a greater quantity will be supplied at higher prices and vice versa.
Determinants of Supply
The supply of a good is influenced by the following factors-
1. Price of the good - As the price of a given commodity say X rises, with the costs and the prices
of all other goods remaining unchanged, the production of commodity X becomes more
profitable. The existing firms are therefore likely to expand their profit and new firms are to be
attracted into the industry. It should be noted however, that not just the current rise but also
expectations concerning the future increases prices may motivate producers. The total supply
of goods is expected to increase as the prices rise.
2. Prices of other related goods - changes in the prices of other commodities may affect the supply
of a commodity whose price does not change.
3. Substitutes two goods X and Y are said to be substitutes in production if the supply of good X is
inversely/negatively related to the price of Y. For instance, barley and wheat or tea and coffee.
If a firm producing both tea and coffee notices that the price of tea is rising may decide to
allocate more resources to tea at the expense of coffee. The supply of coffee will therefore fall
as the price of tea increases. However, the movement of resource from one use to the other is
dependent on the mobility of factors of production.
4. Complimentary goods - two goods X and Y are said to be compliments if an increase in the
price of X causes an increase in the supply of Y such as a vehicle and petrol.
5. Jointly supplied goods - two goods X and Y are said to be jointly supplied if an increase in the
price of X causes an increase in the price of Y such as petrol and paraffin. If the demand for petrol
increases the supply of petrol will rise and at the same time the supply of paraffin will increase.
6. Prices of factors of production - as the prices of factors of production used intensively by
producers of a certain commodity rise, so do the firm costs. This will cause the supply to fall
since some firms will eventually leave the industry. Similarly, if the price of one factor of
production, say land, increases, some firms may move out of the production of land intensive
products into the production of goods that are intensive in other factors of production which
are relatively cheaper. Finally, other less efficient firms will make losses and eventually
leave the market.
7. The state of technology - this is a society’s pool of knowledge concerning industrial activities
and its improvements. Technological improvements or progress such as improvements in
machine performance, management and organization or an improvement in quality of raw
materials leads to lower costs through increased productivity and increases the profit margin
in every unit sold. This leads to increase in supply.
8. Future expectations of price change - Supply of a good is not only influenced by the
current prices but future expected price as well. For example, if the price of a good is expected
to rise the firm may decide to reduce the amount of supply in the current period. This is to enable
them pile stock which they can offer for sale when prices increase in the future. This is known
as hoarding.
9. Government policies – the government policies can be done through;
a. through tax imposition on goods increases the cost of production hence decline in
production and supply
b. Through subsidies -a grant to citizens of a country which lowers the cost of production hence
encourages production and increases in supply.
2
Definition of Supply
Individual supply refers to the quantity of a given commodity that a producer is willing and able to
sell at a given price over a specific time period. Market supply refers to horizontal summation of
individual producers/firms supply in the market. The supply schedule and the supply curve
demonstrate the relationship between market prices and quantities that suppliers are willing to offer
for sale. Supply differs from “existing stock” or the amount available because it is concerned with
amounts actually brought to the market. The basic law of supply states that, “a greater quantity will
be supplied at a higher price than at a lower price”. An individual producer’s supply schedule shows
alternative quantities of a given commodity that a producer is willing and able to sell various
alternative prices for that commodity ceteris paribus (other things remaining constant).
Supply schedule for commodity X
Price per unit in Kshs Quantity supplied each week in units
30 500
31 550
32 600
33 650
34 675
35 700
36 725
This can be represented by the use of a graph referred to as a supply curve as shown in the graph
below
7
36
35
Price X
34
33
32
31
500 550 600 650 700 750
800
Quantity X
1
, A supply curve shows the relationship between the price of the commodity and the quantity
supplied. The relationship is a direct one as the supply curve slopes upwards from left to right.
The direct relationship is a graphical representation of the law of supply which states that other
things remaining constant a greater quantity will be supplied at higher prices and vice versa.
Determinants of Supply
The supply of a good is influenced by the following factors-
1. Price of the good - As the price of a given commodity say X rises, with the costs and the prices
of all other goods remaining unchanged, the production of commodity X becomes more
profitable. The existing firms are therefore likely to expand their profit and new firms are to be
attracted into the industry. It should be noted however, that not just the current rise but also
expectations concerning the future increases prices may motivate producers. The total supply
of goods is expected to increase as the prices rise.
2. Prices of other related goods - changes in the prices of other commodities may affect the supply
of a commodity whose price does not change.
3. Substitutes two goods X and Y are said to be substitutes in production if the supply of good X is
inversely/negatively related to the price of Y. For instance, barley and wheat or tea and coffee.
If a firm producing both tea and coffee notices that the price of tea is rising may decide to
allocate more resources to tea at the expense of coffee. The supply of coffee will therefore fall
as the price of tea increases. However, the movement of resource from one use to the other is
dependent on the mobility of factors of production.
4. Complimentary goods - two goods X and Y are said to be compliments if an increase in the
price of X causes an increase in the supply of Y such as a vehicle and petrol.
5. Jointly supplied goods - two goods X and Y are said to be jointly supplied if an increase in the
price of X causes an increase in the price of Y such as petrol and paraffin. If the demand for petrol
increases the supply of petrol will rise and at the same time the supply of paraffin will increase.
6. Prices of factors of production - as the prices of factors of production used intensively by
producers of a certain commodity rise, so do the firm costs. This will cause the supply to fall
since some firms will eventually leave the industry. Similarly, if the price of one factor of
production, say land, increases, some firms may move out of the production of land intensive
products into the production of goods that are intensive in other factors of production which
are relatively cheaper. Finally, other less efficient firms will make losses and eventually
leave the market.
7. The state of technology - this is a society’s pool of knowledge concerning industrial activities
and its improvements. Technological improvements or progress such as improvements in
machine performance, management and organization or an improvement in quality of raw
materials leads to lower costs through increased productivity and increases the profit margin
in every unit sold. This leads to increase in supply.
8. Future expectations of price change - Supply of a good is not only influenced by the
current prices but future expected price as well. For example, if the price of a good is expected
to rise the firm may decide to reduce the amount of supply in the current period. This is to enable
them pile stock which they can offer for sale when prices increase in the future. This is known
as hoarding.
9. Government policies – the government policies can be done through;
a. through tax imposition on goods increases the cost of production hence decline in
production and supply
b. Through subsidies -a grant to citizens of a country which lowers the cost of production hence
encourages production and increases in supply.
2
