Chapter 5 Law of Supply INTRODUCTION: Units of commodity which are produced by the producers are called production. Some part of the total production kept in a warehouse by the firm is called stock. The quantity which is brought to the market for sale is called supply. MEANING: Supply means the quantity which is actually brought in the market for sale.

Chapter 5 Law of Supply LAW OF SUPPLY Other things remaining the same, the supply at high price will be more as compared to supply at low price. Law of supply presents direct relationship between price and supply of the commodity, in short there is positive relationship between price and supply of commodity Price of WheatQuantity of Wheat

Chapter 5 Law of Supply RATIONAL OF THE LAW OF SUPPLY: Other factors remaining the same, there is direct relationship between price and supply on two account: 1. A producer always intends to gain profit. 2. Lower price the producer who was not ready to supply ASSUMPTION OF THE LAW OF SUPPLY: 1. There should not be increase or decrease in the production of commodity 2. No new substitutes of the commodity should have been invited 3. The seller should not be in any sudden need of cash 4. Tax rates should remain the same

Chapter 5 Law of Supply EXCEPTIONS TO THE LAW SUPPLY: 1. Anticipation regarding future changes in prices 2. Rare articles 3. Supply of labour 4. Commodities with fixed supply in the short period DETERMINANTS OF SUPPLY: 1. Natural factors 2. Cost of production 3. Industrial progress 4. Improvement in the means of transport and communication 5. Political stability 6. Taxes and subsidies

Chapter 5 Law of Supply PriceQuantity demanded (Wheat) Kgs Contraction of Supply Extension of Supply Extension Contraction EXTENSION AND CONTRACTION OF SUPPLY

Chapter 5 Law of Supply INCREASE AND DEACREASE IN SUPPLY Pri ce Quantity demanded (Wheat) Kgs Decrease of Supply Increase of Supply Increase

Chapter 5 Law of Supply PRICE DETERMINATION BY DEMAND AND SUPPLY The price at which buyers buy a commodity and the sellers sell it is determined in the market through exchange If consumer is prepared to pay a high price for a commodity, surely the marginal utility of that commodity to him must be high The price at which he would sell should at least cover the average cost of production TIME ELEMENT IN THE DETERMINATION OF PRICE: 1. Market Price (Very short period) 2. Short period price 3. Long period price 4. Very long period price

Chapter 5 Law of Supply MARKET PRICE AND NORMAL PRICE 1. Market price determine by force of demand and supply while normal price is determine by average basis 2. Normal price is never attained 3. Market price is influenced by temporary factors while normal price determine by long run factors 4. The commodities whose supply is permanently fixed have only market price. They cannot have normal price

Chapter 6 Market MEANING OF MARKET: A market is such an organisation where buyers and sellers come onto contact directly or indirectly, which leads to buying of goods or a service. TYPES OF MARKET: A. Geographical Coverage: 1. Local Market 2. National Market 3. International Market C. Method of Sale 1.Retail and Wholesale Markets 2.Spot and Forward Market B. Elements of Competition: 1. Perfect Competition 2. Monopoly 3. Monopolistic Competition 4. Monopsony 5. Bilateral Monopoly 6. Duopoly 7. Oligopoly

Chapter 6 Market Features of Perfect Competition: 1. Large number of buyer and seller 2. Homogeneous product 3. Free entry and free exit for firms 4. Perfect knowledge 5. Perfect mobility of factors of production 6. Non-existence of transport costs Feature of Monopoly: 1. Single seller 2. Absence of close substitutes 3. Closed entry 4. Less than perfectly elastic demand curve

Chapter 6 Market Types of Monopoly 1. Natural monopolies 2. Legal monopolies 3. Private monopolies and public monopolies 4. Simple monopolies and discriminating monopolies 5. Perfect and imperfect monopoly Features of monopolistic competition 1. Existence of many firms 2. Product differentiation 3. Existence of selling costs 4. Different prices for differentiated products 5. Control over price 6. Ease of entry and exist

Chapter 6 Market Features of Oligopoly: 1. Few sellers 2. Interdependence of firms 3. Importance of advertising and selling costs 4. Indeterminate demand curve 5. Conflicting attitudes of firms 6. Price rigidity