ECONOMICS

CHAPTER 5: LAW OF SUPPLY AND ELASTICITY OF SUPPLY

Class: XII(ISC)
2018-2019
Q1. Define Supply.

Supply is defined as the quantity of a commodity which a producer or sellers are willing
to produce and offer for sale at a particular price during a particular period of time.

Ex. A farmer may not be prepared to sell his produce at Rs.400 per quintal but he may be
ready to sell it, if the prices rises to Rs.500 per quintal.

Individual Supply: It refers to the quantity of a commodity which a firm or producer

is willing to produce and offer for sale at a particular price during a particular period
of time.

Market supply/Industry supply : It refers to the quantity of a commodity which all

firms or producers are willing to produce and offer for sale at a particular price during
a particular period of time.
Difference between stock and supply:-
SUPPLY
It refers to the actual quantity that
the seller is willing to bring into the
market and offer for sale at a
particular price and time.
Supply is related to a period of time
Supply is that part of the stock
which is offered for sale in the
market. In case of durables supply
consists only a part of total stocks
Supply depends on market price
STOCK /Intended supply
It is the total quantity of a commodity
that can be brought into the market for
sale at a short notice.
Stock is related to a point of time.
Stock of a commodity is the total
amount with the producer. In case of
perishables the stock and supply
would be the same.
Stock depends on production,
procurement price of good.

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DETERMINANTS OF SUPPLY
a. Price of the commodity-
Other thing being constant, Higher the price of the commodity, larger will be the
supply and smaller quantity will be supplied at a lower price. At higher price the
producer/firm now expects to earn larger profit and will thereby get motivated to
increase the supply of the commodity.
b. Input prices-
The price of inputs or factors used in production, such as raw materials, labor,
machines etc affect supply. If producers have to pay high prices to secure FOP
needed foe production, its cost of production rises which in turn reduces the profit
margin. Thus, lower amount of output will be produced by the firm and would be
offered for sale at a given price and vice versa.
c. Price of related goods
Supply of related goods also depend upon the prices of substitute goods .If price of
other commodities are rising, while the price of the commodity under question
remains constant, producers will find it more profitable to produce the other
commodities . As a result the supply of the commodity reduces
Ex A farmer can grow various vegetables on a given piece of land. If market price of
peas rises, farmer will produce and supply more peas at the cost of cabbage and other
vegetables by diverting resources from the production of other vegetables to the
production of peas in order to earn more profit.
d. Techniques of Production
An improvement in the technique of production, the invention of new machines and
advanced techniques reduce the code of production and increase the profit margin.
Increased profitability induces the producers to produce more and increase the supply
e. Nature of the commodity
In case of monopoly, one firm produces the entire commodity. A monopolist firm
will like to restrict the output so as to raise the market price. If there is competition
among firms, there will be no tendency to restrict the output. Thus, the competitive
firms are likely to produce and sell more as compared to monopolized industry.
f. The policy of Taxation and Subsidies :
Indirect taxes like sales tax, excise duty etc., are likely to increase the prices of the
commodities and increase in its cost of production and, therefore, it will generally
lead to a decrease in supply. Subsidies also affect the supply of a commodity. The
government pays subsidies to firms to produce certain goods. Subsidies will reduce
the cost and induce the procedures to increase supply.
g. Expectations of Future Prices:
If the producer expect an increase in the price of a commodity in future, then they
will supply less today and hoard it so as to offer a large quantity of the commodity in
future at higher prices. Conversely, expectations of fall in future prices tend to
increase supply
h. Natural Factories :
Natural factors are particularly important for the supply of agricultural products.
Natural factors like drought, flood, unfavourable, climatic conditions, etc. adversely

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 affect the supply of commodities. Heavy rains, flood and drought conditions will lead
to decrease in supply of agricultural commodities. Adequate rain and favourable
climatic conditions may help in increasing the supply of agricultural commodities.
i. Agreement among producers :
Sometimes producers may form a pool and enter into some agreement to restrict the
supply of a commodity to earn large profits. They will create artificial scarcity of the
commodities and, as a consequences, supply will decrease.
j. Availability of Transport and communication facilities:
An improvement in the transport and communication facilities will expand the size of
the market. This will motivate the producers to produce and supply more.
k. Goal of the Firm
The goal of the firms may be
1. Profit Maximization
Higher the profit from the sale of a commodity, higher will be the amount
supplied by the firms and vice versa.
2. Sales Maximization
The firms may aim to maximize the sales or revenue rather than profits. They may
like to maximize the sales or revenue rather than profits. They may like to
maximize the sales in order to acquire status and prestige in the society or to
dominate the market.
3. Risk Minimization
If the firms aim at minimization the risk, they will play safe and produce and
supply a smaller quantity of the commodity.

Supply function
The supply function is a statement which states the relationship between the quantity
supplied of a commodity and its determinants.
Sn=f (Pn)
Where, Sn is the quantity supplied of the commodity.
Pn is the price of the commodity.
Sn =f (Pn , P1 ,….Pn-1 , Gf, Fi … Fm, T, E, Gt, N, Mt…)
Where Sn is the quantity supplied of a commodity ‘n’; f is a symbol showing the
relationship between supply of a commodity ‘n’ and all its determinants; P n is the
price of commodity ‘n’; P1… Pn-1 are the prices of commodities other than ‘n’; Gf is
the goal of the firms; Fi… Fm is expression for prices of different factors of
production; T is the technique of production; E is a symbol for expectation of future
prices; Gt is the taxation policy of the government; N is the natural factors; and Mt
stands for means of transportation.

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 Law of Supply
The law of supply states that, other things remaining same, the quantity of any commodity
that the firms will produce and offer for sale rises with the rise in price and falls with eth fall
in price.
 Following are the assumptions of the law of supply or other things being equal
Prices of other related goods remain constant
 Producers do not expect changes in the prices of the commodity in near future.
 Taxation policy of the government should not change.
 Technology of production should not change.
 Cost of factors of production should not change.
 Goals of the firm should not change

Why does the supply curve slope upwards? / The law of supply indicates a positive
slope/ explanation of law of supply:
Positive slope of a supply curve can be explained in terms of three factors.
1. First reason is that the level of price determines the amount of profits. Higher is the price
of the commodity, the larger is the profit that can be earned, ceteris paribus. This gives
incentives to producers to produce and offer for sale a larger amount of the commodity.
2. The positive slope of the supply curve is also caused by the rise in the marginal cost of
production. Marginal cost of production increases with increase in the amount of
production. This implies that the producer would be prepared to produce and supply a
larger quantity of a commodity only at a higher price, so as to cover higher cost of
production.
3. A rise in price would give incentive not only to the existing producers of a commodity,
but it would also motivate the other prospective producers to produce this commodity so
as to earn higher profits. For example, a rise in price of rice would motivate the farmers
to produce more of rice in place of other products, like wheat.
Thus, at higher prices more firms are willing to enter the market to produce the good.

Individual Supply schedule- A supply schedule is a tabular statement showing various

quantities which producers are willing to produce and sell at various alternative prices
during a given period of time.

It is a tabular presentation of the law of supply.

Price Quantity supplied

2 20

3 40

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 4 60

5 80

6 100

An individual supply schedule is defined as a table which shows various quantities of a

commodity that an individual producer or a firm would offer for sale at different prices
during a given period.

Market Supply schedule-A market supply schedule is defined as a table which shows
various quantities of a commodity that all firms are willing to supply at each market price
during a specified time period, assuming that factors other than the price of the goods are
given

A supply curve is a graphical depiction of the law of supply.

Individual Supply curve:

It is defined as the curve that shows various quantities of a commodity which an individual
producer is willing to supply at different prices during a given period of time, assuming no
change in all other factors affecting supply.
The quantity that all the producers are willing to produce and offer for sale at a particular
price during a specified period is known as market supply or industry’s supply.

Market supply curve:

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It is defined as the curve that shows various quantities of a commodity which all the
producer are willing to produce and supply at different prices during a given period of time,
assuming no change in all other factors affecting supply

Derivation of market supply curve from individual supply curve

Market supply curve can be graphically drawn as the horizontal summation of individual
supply curve.
A market supply curve is sometimes called as industry’s supply curve.

EXCEPTIONAL SUPPLY CURVE:

A. Vertical supply curve.

Supply for some commodities cannot be increased or decreased at all.

Ex. Rare goods, classical paintings, old coins etc.

Whereas, in some other cases supply may be fixed in the short run, and it be
increased in the long run only.

Ex. Agricultural product.

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 In such cases the supply curve will be vertical line parallel to Y axis.

B. Backward bending supply curve.

In certain cases a part of the supply curve may have a backward slope. This would
mean that a smaller quantity would be offered at a higher price than at a lower price.

This type of backward sloping supply curve might occur in case of labour supply.
Workers may be willing to work for shorter hours if wages are higher so as to enjoy
more leisure.

Change in quantity supplied/movement along the same supply curve( change in its own
price)- when the quantity supplied of a commodity changes(rises or falls) as a result of changes
in its own price, while other determinants of supply remain constant, it is known as change in
quantity supplied
 Extension in supply
When the quantity supplied of a commodity rises due to rise in its price, other things
remaining the same. It is called rise in quantity supplied or extension of supply.
 Contraction in supply
When the quantity supplied of a commodity decreases due to fall in its price, other things
remaining the same. It is called fall in quantity supplied or contraction of demand.
Change in supply/shifts in supply( due to change in other factors)

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When the amount supplied of the commodity rises or falls because of change in factors other
than the own price of the commodity, it is called change in Supply.
 Increase in supply
It refers to a situation when the producers are willing to supply a larger amount of a
commodity at the same price or same quantity at a lower price.
 Decreases in demand. - It refers to a situation when the producers are willing to supply a
smaller amount of a commodity at the same price or same quantity at a higher price.
Extension of supply Increase in supply
Other things being equal, when price When at the same price, more is supplied
increases supply of that commodity also due to change in other factors.
increases.

Price(Rs) Qt supplied (kgs) Price(Rs) Qt supplied (kgs)

10 20 10 20
20 30 10 30
Upward movement along the same supply Supply curve shifts downward to the right.
curve.
i. Improvement in technology.
ii. Fall in input prices
It occurs due to rise in price of a iii. Fall in prices of other goods
commodity. iv. Increase in the number of firms
v. Expected fall in prices of goods in
future.
vi. Government raising subsidy and
lowers taxes on production

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 Contraction in supply Decrease in supply
Other things being equal, when price When at the same price, less is supplied
decreases supply of that commodity also due to change in other factors.
decreases

Price(Rs) Qt supplied (kgs) Price(Rs) Qt supplied (kgs)

10 20 10 20
8 10 10 15

Downward movement along the same Supply curve shifts upwards to the left.
supply curve.
i. Use of less efficient production
techniques.
It occurs due to fall in price of a ii. Rise in input prices
commodity. iii. Rise in prices of other goods
iv. Decrease in the number of firms
v. Expected rise in prices of goods in
future.
vi. Government lowering subsidy and
raising taxes on production

Time period and Supply

a. Market period Supply/Instant period Supply-
It refers to the current supply of a commodity. It is very short period in which the
supply is fixed. Thus in the market period firms cannot adjust their output to any
change in price. As a result, the supply curve of such firms remains vertical. (S1)
b. Short period Supply-
Short-run period is the period in which supply can be adjusted to some extent.
Supply may be changed by changing the variable factors like raw materials,
labour etc. i.e., using them intensively by running the existing plant for longer
hours like two-shifts instead of one. Short- period is not long enough for the firms
to set up new plants or new machines (fixed factors) (S2)
c. Long period supply/Normal period supply:
It is the period during which the firms can build new pants or close down the old
plants. Moreover, the new firms can enter the industry by setting up new plants.
Thus, it is possible to bring about a large change in quantity supplied.(S3)

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 S1
S2

Price S3

Quantity supplied

PRICE ELASTICITY OF SUPPLY.

Price elasticity of supply measures the degree of responsiveness of the quantity supplied
of a commodity to a change in its price.
Proportionate change in quantity supplied
Es= --------------------------------------------------
Proportionate change in Price

Degrees of Elasticity of Supply

Ans. The five different types/magnitudes are
1. Perfectly Elastic supply :
It represents a case in which the quantity supplied is responded by an infinite amount to a
very small change in price.
This supply curve runs parallel to X axis. This is an extreme case of supply curve, rarely
exists in actual life.
The supply curve is a horizontal line parallel to the X axis

Es=

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2. Perfectly Inelastic Supply :
When there is no change in supply response, no matter how large a price change takes
place
Ex. There is only one Mona Lisa painting. A higher price cannot bring even
one more Mona Lisa
Es=0

3. Relatively Elastic Supply:

Supply is said to be elastic when the percentage change in the quantity supplied is greater
than the percentage change in its price.
Es > 1

4. Unit elastic supply

Unitary elasticity of supply occurs when the percentage change in the quantity supplied is
exactly equal to the percentage change in price.
Any straight line supply curve drawn through the origin has an elasticity of unitary over
its whole length, no matter what its slope is.
Es=1

5. Relatively inelastic supply

Supply is said to be elastic when the percentage change in the quantity supplied is less
than the percentage change in its price.
Any straight line supply curve that cuts the X-axis has inelastic supply all through.

Es <1

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MEASUREMENT OF ELASTICITY OF SUPPLY.
a. Percentage method.
The ratio of percentage change in quantity supplied of a commodity to a given
proportionate change in its price

es=Percentage Change in Quantity Supplied

Percentage Change in Price

In terms of symbols, we can write

e
Where s stands for elasticity of supply
Q =stands for initial quantity
Q=Stands for change in quantity supplied
P stands for initial price,
P= Stands for change in price
b. Geometric or point method.
Geometric method is used to measure the elasticity of supply at a point on the supply
curve. That is why it is also known as the point method of measuring elasticity of
supply. Suppose we want to measure price elasticity of suppy at point K on the supply
curve SS in Panel (i). Point K indicates that at OP price the quantity supplied is OB.
Extend supply curve SS downward so that it meets X-axis at A. The elasticity of
supply at point K is measuredby the formula AB /OB
It is ratio of horizontal segment AB divided by quantity supplied OB

 In the given diagram AB is smaller than OB, therefore the supply elasticity AB is
less than unity.
OB

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