PRODUCERS BEHAVIOUR -1-

Producers Behaviour

1. CONCEPT OF SUPPLY:
For becoming supply seller has to satisfy following four conditions.
(1) Quantity
(2) Time
(3) Willingness to supply
(4) Ability to supply
 Quantity may be kilos, meters, litters etc.
 Time may be day, week, month, year, etc.
 Willingness to supply depends on price of the commodity.
 Ability to supply depends on stock of commodity.
Thus,
Supply = Quantity + Time + Willingness to supply + Ability to Supply.

2. DEFINITION OF SUPPLY:
Supply refers to quantity supplied by seller at given price, given time, given
place.

3. STOCK:
The term ‘supply’ should not be confused with the stock of goods possessed by
the seller. Supply refers to only the stock, which the seller is willing to sell in the
market. Supply can be less or equal to the stock, but can never exceed the
stock, since a seller cannot supply more than what he possessed.

4. TOTAL OUTPUT:
The term ‘supply’ should not be confused with ‘total output’. Total output refers
to the amount of a commodity produced during a particular period of time. The
stock can be equal to output, if there is no accumulated stock of a commodity. If
there is accumulated stock, the stock will be more than output.

5. INDIVIDUAL SUPPLY:
Individual supply refers to quantity supplied by individual seller at given price,
given time, given place.
This we can explain with the help of following schedule and diagram.

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(a) Individual Supply Schedules :

(i) Meaning :
Individual supply schedule refers to tabular representation of individual
supply. It shows different quantity supplied by seller at different price
level.
This we can explain with the help of the following schedule.
(ii) Individual Supply Schedule
Price Quantity Supplied
1 1
2 2
3 3
4 4
5 5
(iii) Explanation:
From the above schedule we can say that:
 When price is 3, supply also 3.
 When price rises from 3 to 4, supply is also rises from 3 to 4.
 When price is further rises from 4 to 5, supply is also further rises from 4
to 5.
 When price reduces from 3 to 2, supply is also reduces from 3 to 2.
 When price further reduces from 2 to 1, supply is also further reduces
from 2 to 1.
 From the above explanation we can say that when price is high, supply is
also high and when price is low, supply is also low. At higher price more
quantity supplied and at lower price less quantity is supplied.

(b) Individual Supply Curve:

(i) Meaning:
Individual supply curve refers to graphical representation of individual
supply. It shows different quantity supplied by individual seller at different
price level. This we can explain with the help of following diagram.
(ii) Individual Supply Curve:

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(iii) Explanation:
From the above diagram we can say that:
 When price is OP, supply is OQ
 When price rises from OP to OP1, supply is also rises from OQ and OQ1.
 When price reduces from OP to OP2, supply is reduces from OQ to OQ2.
 “SS” is a supply curve which slopes upward from left to right showing
direct relationship between quantity supplied and price.
 So we can say that at higher price more quantity is supplied and at
lower price less quantity supplied.

6. MARKET SUPPLY :
(a) Market Supply:
Meaning:
Market supply refers to quantity supplied by market at given price, given time,
given place.
This we can explain with the help of following schedule and diagram.
(b) Market Supply Schedule:
(i) Meaning:
Market supply schedule refers to tabular representation of market supply.
It shows different quantity supplied by market at different price level.
This we can explain with the help of following schedule.
(ii) Market Supply Schedule:

(iii) Explanation:
From the above schedule, we cay say that
 When price is 3, supply is 12.
 When price rises from 3 to 4, supply also rises from 12 to 15.
 When price further rises from 4 to 5, supply also rises from 15 to 18.
 When price reduces from 3 to 2, supply also reduces from 12 to 9.
 When price further reduces from 2 to 1, supply also reduces from 9 to
6.

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 So we cay say that at higher price more quantity is supplied and at

lower price less quantity is supplied.
(c) Market supply curve :
(i) Meaning:
Market supply curve refers to graphical representation of market supply. It
shows different quantity supplied by market at different price level.
This we can explain with the help of the following diagram:
(ii) Market Supply Curve:

(iii) Explanation:
From the above diagram, we can say that
 “S1S1” is supply curve of Mr. A
 “S2S2” is supply curve of Mr. B.
 “S3S3”is supply curve of Mr. C.
 “SS” is supply curve of market which slopes, upward from left to right
showing direct relationship between price and market supplies.
 So we can say that at higher price more quantity is supplied and at
lower price less quantity is supplied.

7. DETERMINANTS OF SUPPLY OR FACTOR AFFECTING OF SUPPLY:

There are various factors that influence the supply of a commodity in the market,
which are as follows:

1. Price of the Commodity:

The supply of commodity is directly related to its price. Generally, more quantity
of a commodity is offered for sale at a higher price, and less quantity is offered
for sale at a lower price.

2. Substitutes:
The availability of cheap substitutes may reduce the supply of a commodity in
the market. This is because consumers may prefer cheap substitutes.

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3. Availability of Input:
The supply is affected by the availability of inputs for production. If there is
shortage of inputs, the production would be less, and thus, the supply would be
lower. If input is available in the market then production will be more and supply
will be higher.

4. Nature of Labour:
The supply is influenced by the nature of labour available to the producers. If the
workforce is competent and dedicated, then the production would be higher, and
so too would be the supply in the market. But if labour are uneducated, lazy,
untrained then production and supply will be less.

5. Technology:
The type of technology used by producers influence the production. Modern
technology not only improves the quality, but also the quantity of production.
The quantity of production is increased due to the speed of the machines, and
also there is reduction in wastage. The increased production facilitates more
supply in the market. But if producer uses outdated technology then production
and supply will be less.

6. Government Policy:
Government policy towards fares, incentives, licensing etc. influence the supply
in the market. For instance, if the Government provides lot of incentives to the
producers in the form of tax holiday, subsidies on inputs, cash incentives etc.,
then the producers would be willing to produce more, which would increase the
supply in the market. But if government policy is against the producer then
supply will be less.

7. Cost of production:
A rise in production cost may reduce the supply in the market, especially, when
higher costs are not viable. A fall in production cost may induce the producer to
produce more and accordingly supply more in the market. There is inverse
relationship between cost of production and supply.

8. Transport Facilities:
Modern and speedy transport facilities increase the supply of goods in different
markets. On the other hand, slow transport, breakdown, strikes etc. decrease
the supply of goods.

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9. Nature of market:
Supply is influenced by the nature of a market.
(a) In a highly competitive market, the supply may be higher.
(b) In a monopolistic market, the supply may be lower. The monopolist may
even create artificial shortage to hike the prices.

10. Climatic condition:

The supply of agricultural product is determined by climatic condition. Favourable
climate, rainfall, temperature etc. increase the supply of agricultural products, on
the other hand, drought, floods, extreme variations in temperature etc. reduces
the supply.

11. Export and Import:

Export of goods result in reduced supply of goods in domestic market. On the
other hand, import of goods increases the supply of different goods and services.

12. Demand of the Commodity:

If there is low demand for a commodity the supply would be lower. And if there
is rise in demand for a commodity, the supply would be higher.

13. Future Expectation:

Expectation about the future price will affect the supply. If the prices are
expected to rise in future, the producers may hold on to the stock, rather than
supplying it in the market. This will reduce the supply in the market for the time
being.

8. LAW OF SUPPLY:
a) Statement of law:
“According to Marshall other things being equal, quantity of a
commodity supplied varies directly with its prices.”

b) Explanation of the Statement:

More quantity of a commodity is offered for sale at a higher price and less
quantity is offered for sale at a lower price so supply of a commodity is directly
related to its price.
This, we can explain with the help of following schedule and diagram

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c) Supply Schedule:
i) Meaning:
Supply schedule refers to tabular representation of law of supply. It shows
different quantity supplied by seller at different price level.
This we can explain with the help of following schedule.
ii) Supply Schedule:
Price Quantity Supplied
1 1
2 2
3 3
4 4
5 5

iii) Explanation:
From the above schedule, we can say that
 When price is 3, supply is also 3.
 When price rises from 3 to 4, supply also rises from 3 to 4.
 When price further rises from 4 to 5, supply also rises from 4 to 5.
 When price reduces from 3 to 2, supply also reduces from 3 to 2.
 When price further reduces from 2 to 1, supply also reduces from 2 to
1.
 From the above explanation, we can say that when price is high, supply
is also high. When price is low, supply is also low. At higher prices,
more quantity is supplied and at lower prices less quantity is supplied.

d) This we can explain with the following diagram:

i) Supply Curves:
Supply curves refers to graphical representation of law of supply. It shows
different quantity supplied by seller at difference price level.

ii) Supply Curve:

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iii) Explanation

e) Assumption:
1) No change in price of substitute goods:
There should be no change in price of substitute goods. If price of substitute
goods is change supply also changes. It is against of law of supply. Therefore,
we have to assume that price of substitute goods should remain constant.

2) No change in availability of inputs:

If availability of inputs are change supply also changes. It is against of law of
supply. Therefore, we have to assume that Availability of Inputs should remain
constant.

3) No Change in Nature of Labour:

It is against of law of supply. There should be no change in nature of labour. If
nature of labour changes supply also changes. Therefore, we have to assume
that nature of labour should remain constant.

4) No change in technology:
There should be no change in technology. If technology changes supply also
changes. It is against the law of supply. Therefore, we have to assume that
technology should remain constant.

5) No change in government policy:

It is against law of supply. There should be no change in government policy. If
government policy is change supply also changes.

6) No change in cost of production:

We have to assume that cost of production should remain constant. It is against
of law of supply. There should be no change in cost of production. If cost of
production is change supply is also changes.

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7) No change in transport facilities:

There should be no change in transport facilities. If transport facilities changes
supply also changes. It is against law of supply. Therefore, we have to assume
that transport facilities should remain constant.

8) No change in nature of market:

It is against the law of supply. Therefore, we have to assume that nature of
market should remain constant. There should be no change in nature of market.
If nature of market change supply also changes.

9) No change in number of sellers:

Therefore, we have to assume that number of seller should remain constant. It is
against law of supply. There should be no change in number of seller. If number
of seller change supply also changes.

10) No change in Climatic Condition:

It is against law of supply. Therefore, we have to assume that climatic condition
should remain constant. If climatic condition change supply also changes.

11) No change in goal of production:

There should be no change in goal of producer. If goal of producer changes
supply also changes. Therefore, we have to assume that goal of producer should
remain constant. It is against law of supply.

12) No change in Import and Export:

We have to assume that Import and Export should remain constant. If import
and export changes supply also changes. It is against the law of supply.

9. EXCEPTION OF LAW OF SUPPLY:

The law of supply states that the supply of a commodity varies directly with its
price. But there are some exception when less quantity is supplied at a higher
price and vice-versa, such exception are as follows :

(1) Labour Supply :

In case of labour supply, if wages rises, supply of labour also rises but after one
point if wage further rises, supply of labour reduces. This is the case of exception
to the law of supply.
This we can explain with the help of following schedule and diagram.

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Wage per hour (price) No. of hours (supply) Total Wages

10 4 40
20 6 120
30 8 240
40 10 400
50 12 600
80 14 1120
100 12 1200
150 10 1500
From the above schedule we can say that
(1) When price rises from 10 to 80, supply of labour also rises from 4 to 14.
(2) If wages further rises from 80 to 100 &150, supply of labour reduces from
14 to 12 and 10.
(3) So we can say that if wages rises after one point supply of labour reduces.
Backward Banding Supply Curve

Explanation:
From the above diagram we can say that
(1) From point A to B, if wages rises supply of labour also rises.
(2) From point B to C, wages further rises but supply of labour reduces.
(3) A, B, C is Backward Bending supply curve which is an exception to the law
of supply.

(2) Saving/Investment:
In case of saving/investment if rate of interest rises supply of investment also
rises but after one point if rate of interest further rises supply of investment
reduces. This is the case of exception to the law of supply.

This we can explain with the help of following schedule and diagram.

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Rate of Interest (price) Saving / Investment (Supply) Interest p.a.

4% 1,00,000 4,000
6% 2,00,000 12,000
8% 3,00,000 24,000
10% 4,00,000 40,000
20% 3,00,000 60,000
30% 2,50,000 75,000
From the above schedule, we can say that
(1) When rate of interest rises from 4% to 10% supply of investment also
rises from 1,00,000 to 4,00,000.
(2) If rate of interest further rises from 10% to 20% and 30% supply of
investment reduces from 4,00,000 to 3,00,000 and 2,50,000.
(3) So, we can say that if rate of interest rises after one point supply of
investment will reduce.
Backward Bending supply curve

From the above diagram we can say that

 From point A to B if rate of interest rises supply investment also rises.
 From point B to C, rate of interest further rises, supply of investment reduces.
 A, B, C is backward bending supply curve which is an exception to the law of
supply.

(3) Need for Urgent funds:
A businessman may face an urgent need for funds, and as such he may sell out
more goods even at lower prices. This is an exception to the law of supply.

(4) Perishable goods;

The sellers have to dispose of the perishable goods like meat, fish, fruits, flowers
etc. even if the price falls. They cannot wait for a longer time for the price to
rise, in order to increase supply.

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(5) Change in Fashion:

If some goods become out of fashion, the sellers may sell such goods at a throw
away prices to clear off these goods. This is also an exception to the law of
supply.

(6) Closure of Business:

If a seller is likely to change over the business line or close down the present
business, then he will not follow the law of supply. He may try to clear the stock,
even if the prices are low. He may also offer extra incentives to the buyer in
order to clear the stock.

(7) Recession:
During the period of recession, sellers are forced to sell their goods even at low
prices. This is because, during recession, the purchasing power of the people is
very low. Besides, the storage and maintenance cost may also go up and also
there may be damages to the goods and loss to the sellers.

(8) Anticipation about future price:

If the seller anticipate a future rise in price, they may withhold the supply with a
view to earn more profits in the future. Even if the price is high, seller are not
ready to release the goods in anticipation of future rise in price, excepting to
make huge profits.

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VARIATION IN SUPPLY AND CHANGE IN SUPPLY

1) Variation in supply:
Meaning: If supply rises or reduces due to price then it is called as variation in
supply.
Types: There are two types of variation in supply
1. Extension in supply
2. Contraction in supply
Reason: reason of variation in supply is only price and other factors affecting
supply will remain same.
Diagram:

Movement: Supply curve moves upward and downward on the same supply
curve.
2) Extension or Expansion of supply:
Meaning: If supply rises because of price then it is called as extension in supply.
Concept: Extension in supply is concept of variation in supply.
Reason: Reason of extension in supply is price only. If price rises supply also
rises then it is called as extension in supply.
Diagram:

Movement: In extension in supply, supply curve is moving towards upward on

the same supply curve.

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3) Contraction in Supply:
Meaning: If supply reduces because of price then it is called as contraction in
supply.
Concept: Contraction in supply is concept of variation in supply.
Reason: Reason of contraction in supply is price only. If price reduces supply
also reduces then it is called as contraction in supply.
Diagram:

Movement: In contraction in supply, supply curve is moving downward on the

same supply curve.
4) Change in supply:
Meaning: If supply rises or reduces because of factors other than price then it is
called as change in supply.
Types: There are two types of change in supply.
1. Increase in supply
2. Decrease in Supply
Reason: Reason for change in supply is factors other than price for e.g.
1. Raw material availability
2. Nature of labour
3. Technology etc.
Diagram:

Movement: In case of change in supply, supply curve is moving from left to right
and right to left and forming new supply curve.
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5) Increase in supply:
Meaning: If supply rises because of factors other than price then it is called as
increase in supply.
Concept: Increase supply is the concept of change in supply.
Reason: Reason for increase in supply are factors other than price for e.g.
1. Increase in Raw material
2. Efficient labour
3. New Technology etc.
Diagram:

Movement: In case of increase in supply, supply curve is shifting from left to

right and forming new supply curve.
6) Decrease in Supply:
Meaning: If supply reduces because of factors other than price then it is called as
decrease in supply.
Concept: Decrease in supply is a concept of change in supply.
Reason: Reason for decrease in supply is factors other than price for e.g.
1. Raw material decrease
2. Inefficient labour
3. Old Technology etc.
Diagram:

Movement: In case of decrease in supply, supply curve is shifting from right to

left and forming new supply curve.

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CONCEPTS OF COSTS
A Producer has to incur costs of production. He has to pay for various inputs like
labour, raw materials, interest on capital, rent of land / premises, etc. The
expenditure incurred on the inputs is known as cost of production.
The total cost of production increases with an increase in the output. However
per unit cost may reduce with the increase in production on account of
economies of large scale.
There are three main concepts of costs:
 Total Cost
 Average Cost
 Marginal Cost

1. Total Cost: It is the total expenditure incurred by a firm on the factors of

production. It is the sum of total fixed costs and total variable costs.
 The fixed costs include rent of the premises, wages to permanent
employees, etc. the fixed costs remain same irrespective of the level of
production.
 The variable costs include additional labour costs, material costs, fuel
charges, etc. they vary with the level of production.
Total Cost = Total Fixed Costs + Total Variable Costs
(TC = TFC + TVC)
For instance, the total fixed costs are RS.100, and total variable costs are
RS.200. Therefore, the total cost will be RS. 300.
2. Average Cost: It is also called as unit cost. It is equal to total cost divided by
the total number of units produced. Average costs may be dependent on the
time period. For increasing production in the short run, the average cost may
increase. In the long run, average cost of production may decrease.

Average Cost = Total Costs

Total Quantity
[AC = TC ]
TQ
For instance, if the total costs are RS. 300 for 5 units. Thus, the average cost
per unit will be RS. 300/5 = RS. 60/-
3. Marginal Cost: In economics, marginal cost is the change in the total cost
that takes place when the quantity produced changes by one unit. It is the
cost of producing one more unit of a community. Thus, the marginal
cost is the net addition made to the total cost with the production of one
additional unit of output.
Marginal Cost = Change in Total Cost
Change in Total Quantity
[ MC = ΔTC]
ΔTQ

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For instance, if the total cost of producing 5 units is RS. 300/- and the total
cost of producing 6 units is RS. 350/-, the marginal cost of the 6th unit is RS.
50/-.
350 – 300 = 50 = RS. 50/-
6–5 1

CONCEPTS OF REVENUE
Revenue is the amount received by a firm from the sale of a given number of
units of commodity in the market at the same price or at different prices.
The three main concepts of revenue are as follows:
 Total Revenue
 Average Revenue
 Marginal Revenue

1. Total Revenue: It is the total revenue or receipts from the sale of a given
number of units of a particulars commodity. It is total amount of money
received by a firm from the sale of a product in the market.
Total Revenue = Total Quantity x Price per Unit
(TR = TQ x P)
For example, if a manufacturer sells 10 TV sets for RS. 20,000/-each, the total
revenue will be: 10 x 20,000 = RS. 2,00,000
2. Average Revenue: It refers to the revenue per unit of commodity sold. It is
calculated by dividing the total revenue by the number of units sold.
Average Revenue = Total Revenue
Total Quantity
[ AR = TR]
TQ
For example, if the total revenue of sale of 10 TV sets is RS. 2,00,000/-, the
average revenue will be RS. 20,000 per unit. (2,00,000 / 10)
3. Marginal Revenue: It is the additional revenue received by a firm from the
sale of an extra unit of a commodity. For example, if a firm sells 10 TV sets for
RS. 2,00,000 and the total revenue generated by selling 11th unit is RS.
2,15,000/- then marginal revenue on account of 11th TV is RS. 15,000/-

Marginal Revenue = Change in total revenue

Change in total number of units

[ MR = ΔTR= 15,000 = RS. 15,000 ]

ΔTQ 1

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