Wednesday 21 September 2016

PRODUCER’S BEHAVIOUR AND SUPPLY

Meaning of supply 

Supply means the quantity of a commodity which a firm or an industry is willing to produce at a particular price, during a given time period.

Law of supply 

This law states that 'other things remaining the same', an increase in the price of a commodity leads to an increase in its quantity supplied. Thus, more of a commodity is supplied at higher prices than at lower prices.

‘Change in supply’ versus ‘change in quantity supplied’

 (‘shift of supply curve’ versus ‘movement along a supply curve’)
 The supply of a commodity depends on its own price and 'other factors' like input prices, technique of production, prices of other goods, goals of the firm, taxes on the commodity etc. Movement along a supply curve The law of supply states the effect of a change in the own price of a commodity on its supply, other things remaining constant. The supply curve also carries the same assumption. Thus when other factors influencing supply do not change, and only the own price of the commodity changes, the 9 change in supply takes place along the curve only. This is what movement along a supply curve means. A movement from one point to another on the same supply curve is also referred to as a change in quantity supplied”.‘Change in supply’ versus ‘change in quantity supplied’ (‘shift of supply curve’ versus ‘movement along a supply curve’) The supply of a commodity depends on its own price and 'other factors' like input prices, technique of production, prices of other goods, goals of the firm, taxes on the commodity etc.

Movement along a supply curve

 The law of supply states the effect of a change in the own price of a commodity on its supply, other things remaining constant. The supply curve also carries the same assumption. Thus when other factors influencing supply do not change, and only the own price of the commodity changes, the 9 change in supply takes place along the curve only. This is what movement along a supply curve means. A movement from one point to another on the same supply curve is also referred to as a change in quantity supplied”.


Shifts of the supply curve

 When supply changes due to changes in factors other than the own price of the commodity, it results in a shift of the supply curve. This is also referred to as a “change in supply”. An ‘increase’ in supply means more of the commodity is supplied at the same price. As a result the supply curve shifts to the right.
An ‘increase’ in supply can take place due to many reasons. For example, if the input prices fall or there is an improvement in technology, it will enable producers to produce and sell more at the same price resulting in a rightward shift of the supply curve.
A decrease in supply means less of the commodity is supplied at the same price, than previously. As a result, the supply curve shifts inwards to the left.

Shifts of the supply curve of a good are caused by a change in any one or more of the 'other factors' affecting supply, own price remaining unchanged. For example, if the input prices fall or there is a decrease in the prices of other related commodities, the producers supply more at the same price resulting in a rightward shift of the supply curve.


PRODUCER'S EQUILIBRIUM 

The primary objective of a producer is to earn maximum profits. Profit is the difference between total revenue and total cost. At that level of output, he is in equilibrium at which he is earning maximum profit, and he has no incentive to increase or decrease his output. If he produces less than this he does not maximize total profits. Similarly, if produces beyond this, total profits decline. Thus the producer is in a 'state of rest' only at the level of output at which the difference between the total revenue and total cost of production is maximum i.e total profits are maximum.



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