Supply Curve of a Firm (with diagram)

The factor supply can be defined as the quantity of a factor which all the suppliers in an economy will supply at different prices to the producers of goods and services.

In case of a product, the law of supply explains that more the product price more will be its supply or, a direct relationship between price of the product and its supply. However, the law as it is cannot be extended to the supply of different factors of production. It is because of specific nature of the factors which varies from factor to factor. Hence, supply behaviour of all the major factors of production are to be dealt separately.

Supply of Land:

The supply of land has to be viewed differently for the economy or country as a whole and for a firm in the economy.

Given that geographical area of a country is fixed, the availability or supply of land in the economy will also be fixed irrespective of its price. In other words, an economy cannot enhance the supply of land supply even if it offers a higher price. Land is a natural gift which cannot be created. Hence, it can be argued that supply of land for an economy is constant and completely price inelastic.

Unlike this, supply of land for a firm is relatively elastic. A firm can procure more land from the market, if it so desires, by paying a price for it. The market price of land will depend upon its opportunity cost. The opportunity cost of land is the cost of next best use of the land in that particular area. Higher the opportunity cost more will be the market price of land.

Since the opportunity cost of land varies from area to area within the economy, its market price will also vary, sometime widely. For example market price of land in the heart of a metro-city will be few lakhs rupee per square yard while it may be a few hundred rupees in a village.

Generally speaking, supply curve of land for an industry will be a positively sloped curve exhibiting a direct relationship between price of land and its availability, other factors remaining the same.

In the Figure-14.4, SS curve shows supply of land for an economy. It is a line parallel to Y-axis which shows that whatsoever be the price, availability of supply of land will be same.

In contrast, supply curve of land for a firm (S₁S₁) is drawn as a positively sloped one which shows that a firm can have more land if it is willing to pay a higher price for it.

Supply of Labour:

In the case of labour, supply can be measured as number of work hours for which a person is available for working at different wage rate. Hence, wage rate will be the payment per hour made to the person. Every person in the job market will offer himself for a certain number of hours to work so as to earn income for meeting its family requirements.

In this regard, there may be considerable variation among person to person. Some persons, who have a strong urge to become rich, may offer for a larger number of hours to work while others may be will to work for a limited number of hours only. Still some generalization may be made and a supply curve of a worker can be generated.

Based on the above, one can argue that more the number of hours a person works more will be the factor payment in the form of wages. However, irrespective of the wage level, a person will not offer himself for unlimited number of hours as he requires time for other activities, including leisure, as well.

A supply curve of a worker can be drawn on the basis of a supply schedule which will show the number of hours a person is willing to offer his services at different wage rate.

Such a schedule is constructed as follows:

The table shows that as the wage rate increases from Rs.20 to Rs.70 per hour, the worker offers for more number of hours to work, from just 4 to 10 hours. However, he is not willing to work for more than 10 hours, at the cost of leisure and other activities, even if wages rises substantially. In fact, as the wage rate increases from Rs.100 to 170, he rather offers for a lesser number of hours to work as his total earnings are quite high. At the wage rate of Rs.130 and 170 per hour, he offers for only 8 and 6 hours respectively for work, as against 10 hours at the wage rate of Rs.100/hour.

Such behaviour of the worker can be appropriately depicted by a backward sloping supply curve which shows that as the wages per hour increases initially, the person will offer its services for a rising number of hours and subsequently for lesser number of hours even if wage rate further in­creases. In the Figure-14.5, the supply curve of a worker (SS₁) is positively sloped up to point R on it (S₁R) or up to the wage level OW at which number of hours offered for work is OM.

As the wage rate further increases, the worker offers for a lesser and lesser number of hours for work and, hence, the supply curve slops backward, as indicated by RS portion of the curve. Thus, at OW₁ (> OW) level of wages, he offers for only OM₁ number of hours which is less than OM.

The point at which the supply curve will turn backward will depend upon the work to leisure ratio. If the person is inclined to earn more by having lesser number of leisure hours, the turning point will be at a higher wage level. In contrast, if he is satisfied with a low income and inclined for more leisure, the turning point will be at a lower wage level only.

Supply of Capital:

The capital is a man-made factor. It mainly depends upon saving in the economy. According to classical economists, saving depends upon the market rate of interest. Higher the rate of interest more will be saving and, in turn, more will be supply of capital.

However, demand for capital will be inversely related to rate of interest as the interest is a cost for the entrepreneur. Therefore, equilibrium rate of interest will be such at which saving will be equal to demand for capital. That will be the price of capital.

Determination of Factor Price:

Having examined demand and supply parameters of different factor, the price determination of a factor can be discussed. The price of a factor will be such at which demand for a factor service will be equal to its supply. To determine such a factor price, we will draw both the demand and supply curves relating to a factor simultaneously.

In the Figure-14.6, demand and supply curve of labour is drawn assuming perfect competition in both product and factor market. The two curves intersect each other at the wage level OW. At this wage level, demand for labour is equal to supply of the labour services at OL quantity.

For whatsoever reason, if wage rate moves away from the equilibrium level, a situation of excess supply or labour scarcity will emerge. For instance, if the wage rate increases to OW₁ from the equilibrium level, demand for labour will fall while workers will offer themselves for more number of hours and, hence, there will be excess supply situation. This will force some of the workers to offer their services at a lower wages and, hence, the wage rate will fall back to equilibrium level.

Similarly, if wage rate fall below equilibrium level, the factor supply will decline while its demand will rise. This will result into a labour scarcity forcing some of the employers to offer higher wages. This tendency will push wage rate up to reach again at equilibrium level.

In nutshell, any disturbance from equilibrium level will force the factor price to return back to equilibrium level.