The Law of Supply: Supply Schedule and Supply Curve

As we have seen earlier, a supplier always tries to sell more and more commodities when prices are high, and, conversely, restricts his supplies when prices start falling. This is the underlying law of supply.

The law of supply employs this basic reality in its definition. It assumes that, while other factors determining supply remain constant, price changes will result in changes in the quantity supplied.

The Law of Supply Definition

The law of supply states that "all other factors remaining constant, an increase in the price will result in an increase in quantity supplied and vice versa". 

In other words, the law of supply states that there is a direct relationship between price and quantity.

Businessmen, whether producers, sellers, or service providers, tend to release more of their products into the market when prices rise, in order to pocket more profits.

Conversely, when prices fall, they tend to withdraw or restrict stocks to stabilise the prices of their goods.

These variations in the supply chain are studied and controlled by preparing presentations through charts and graphs. They are known as "Supply Schedules" and "Supply Curves" in economics. 

Supply Schedule

A supply schedule is a table or chart showing the changes in quantities supplied at varying ranges of the price of a commodity.

Suppose a supplier deals in rice.

 

At a price of, say, Rs. 50 per kg, the supplier will put into the market all of his stock, say 10,000 kg of rice. 

If the price comes down to Rs. 45 per kg, he may sell only, say, 8,000 kg. 

If the price further goes down to Rs. 40, he will restrain more and will supply only 5,000 kg. 

On the other hand, suppose the price increases from Rs. 50 to Rs. 60 per kg, he will try to procure more stocks from other sources and increase his supplies to 15,000 kg. 

The same can be presented through a chart as shown below:

Supply Schedule chart

Price of Rice (Rs. Per kg)	Quantity of rice supplied (in Kg)
60	15,000
50	10,000
45	8,000
40	5,000

So, it is clear from the above supply schedule that the supplier decreases his supply quantity when prices fall. 

If you view the same chart from bottom to top, you will realise that the supplier has increased his supply whenever the price increased from the previous price. 

The same thing can be illustrated through a supply curve also.

Supply Curve

A supply curve is the line or graph connecting all the points representing supply levels at various commodity prices.

So, a Supply Curve can be defined as the graphic representation of the relationship between the price of a commodity and the quantities supplied by the supplier.

The quantities supplied are measured on the horizontal axis and the prices on the vertical axis in the graph below.

Example of Supply Curve:

From the above supply schedule of rice, we can draw the supply curve. 

Let us start with the price as 'zero' and quantity supplied also as zero. And then, denote the points from the Supply Schedule.

So, the supply curve will be like this, as represented below:

The supply curve will rise as prices increase, because the supplier will continue to increase the quantity supplied with every price increase, unless he is unable to do so because of other factors affecting supply. In such cases, when he is unable to maintain his supply, the supply curve may begin to fall.

There can be many factors that affect supply. To know the factors affecting supply, you may view the information at this link.

Revenue Definition, and Different Types of Revenue in Economics

Definition of Revenue:

According to the International Financial Reporting Standards (IFRS), Revenue is the inflow of economic benefits arising during the ordinary course of an entity's economic activities.

The inflows should directly come from its product-selling activities or services rendered. They should not include other income.

According to the above definition, Revenue = Gross Receipts from sales or services. Other receipts like interest, royalties, and rents (which are not part of their core business) are treated as Misc. Income/Receipts.

Revenue is also referred to as Gross Income or Gross Receipts.

Generally, revenue is measured as receipts accrued from sales or services performed during a specific period of time - say, a particular week, a particular month, or a year. It is irrespective of whether payment is received during that same period or not.

IFRS Definition vs Accounting Concept of Revenue:

But, for accounting purposes, while preparing the Profit and Loss/ Balance Sheets, or Revenue Budgets, all types of income are considered as revenue. So, an accountant takes receipts from the sale of assets, interest received from banks, and rent receipts, etc., as Revenue in his books.

Revenue is the income earned by a business enterprise, organisations, or governments. Revenue may be either in the form of sales proceeds from goods and services sold, or in the shape of receipts from other activities and sources of any enterprise or government. So, for business organisations, revenue includes sales income and/or fees received for services rendered.

In the case of Governments, revenue includes receipts from the collection of taxes, duties, and Bonds and Debentures, if any, invested by them. It can include even donations received from others, funds received from other social activities, etc. All these receipts are collectively known as revenue.

Financial Statements prepared by companies for arriving at Net Profit/Loss consider income received from other sources also as their receipts in order to tally them against their total expenditure.    

Different Types of Revenue in Economics

There are different concepts of revenue according to the nature of organisations.

Sometimes, revenue can be referred to as business revenue, government revenue or association revenue based on the nature of organisation or enterprise.

Business Revenue

Business revenue refers to income or receipts from normal business activities of any organisation. Businesses that indulge in the manufacturing and/or selling of products, or in providing services to their clients, receive income either in the form of sales or as fees for services. This income is known as 'business revenue'.

 

The main point is that the income should be from their primary business activity. 

If one is engaged in a rental business, then his business income is the rent received. 

If it is a financial institution, then its income will be from interest and other charges received from lending loans.

This business revenue can be classified into two parts: sales income and other income.

1) Sales Revenue or Sales Income;
Sales revenue denotes the income received by way of sales of goods or services. 

For a manufacturer, it is income from the sale of produced goods. 

For a grocery store or merchant, it is income from the sale of provisions or merchandise. 

For a banker, it can be the sale of loans. 

For a service provider, such as a consultant, barber, or cobbler, it is the service charges received. 

So, sales revenue is their business income.

2) Other Revenue or Other Income:
While performing a business, you may receive some income that is not directly related to your primary business activity. 

For example, you are running a manufacturing business. You sell your produce and receive the revenue. Now, you may not be spending all that income for your business. 

You may deposit some money in fixed deposits or invest in other investments. So, you will be receiving interest from these investments. It is not your sales income. It is to be termed as 'other income'.

Similarly, you may sell some old machinery or assets and buy new ones. This sale of old assets is not your primary sale. It is your 'other income'.

If you can rent a part of your building or any machinery to others for a short period, the rent received is also treated as 'other income'.

Government Revenue

Government revenue is entirely different from business revenue. Government revenue is the money received from various taxes and duties imposed by the government to meet its expenditure in the running of the government and funding various development programs of the country.

The receipts include collections from Income Tax, Goods and Services Tax, Sales Tax, etc., and duties such as Customs Duty, Excise Duty, Export/Import Duty, etc. 

Government revenue may also include income generated through financial and banking operations and through the railways and tourism departments. All these are part of government revenue intended for spending it back on public works and other welfare activities for the country.

Association Revenue (Social & Non-Profit Organisations)

Association revenue is that type of revenue generated by non-profit organisations and public associations like cooperatives and NGOs. It is a fund created through non-business-oriented activities for a common cause of the members of the organisation or for public welfare. The revenue generated includes membership fees of members, donations or charity funds received from outsiders, and any financial help received from governments, etc. They may also generate revenue through sponsorship of cultural or other programmes.

For information regarding the Concepts of Total Revenue, Average Revenue, and Marginal Revenue,

please go to this link: Concepts of Revenue and Calculation formulae