1

Supply
Define Law of Supply with the help of Schedule & Diagram. What is
the Difference Between Supply and Stock?

Meaning of Supply
The quantity of a good which is offered for sale at a specific price is called supply.

Law of Supply:-
Other things remaining the same, when the price of a good raises the sellers increase
the supply of that good and when the price falls they decrease the supply of the good. This
behavior of the seller is called Law of Supply.

Definition
“Other things remaining same, if the price of a commodity increases its quantity
supplied increases and if the price of a commodity decreases, quantity supplied
also decreases.”

Difference Between Supply & Stock

A quantity of good which is brought into the market for sale is called supply. While stock
is that quantity of a good which is saved in the ware-house and can be offered any time for sale
is called stock.

Assumptions of the Law

 No Change in Cost of Production:-

It is assumed that there is no change in cost of production because the profit decreases with
the increase in cost of production.
 No Change in Technology:-
It is assumed that technique of production does not change. If better methods of production
are invented, the production increases, the profit will also be increased with it.
 No Change in Climate:-
It is assumed that there is no change in climate. For example, at any place flood or earth quake
occurred, the supply of goods decreases at that place at previous price.

 No Change in Prices of Substitutes:-

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If the price of substitutes of a commodity falls, the consumers begin to use alternate. So the
supply of a commodity falls without any change in price.

 No Change in Natural Resources:-

If the natural resources increase, the cost of production decreases, the supply will be increased.
 No Change in Capital goods:-
If the cost of production increases due to increase in the price of capital goods, it will effect in
decreasing of supply.

 No Change in Political Situation:-

The condition of investment is affected by the change in the political situation of a country. The
production of goods decreases due to decrease in investment.

 No Change in Tax Policy:-

It is also assumed that the taxation policy of the Govt. does not change. The increase in taxes
effects the investment and production and supply of goods decreases.
Schedule & Diagram: Y S

500
Price Supply
100 8000 400
Price

Price

200 10000 300

S
300 12000 200

Oo
400 14000 100
O 8000 10000 12000
500 16000 14000 16000
Supply

In the above table it is shown that the supply of a commodity increases with increasing
in price.
In diagram, SS is the supply curve raising upward from left to right, it represents large quantity
in supply at higher price and a, b, c and d point shows that when price of a good increases
supply of a good will also be increased.
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Adil Hayat……..GCC, AIT, LAHORE
n

What is Elasticity of Supply? How it can be Measured ?

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Introduction:-
According to the Law of Supply, other things remain the same, when price raises the
supply of the commodity increases and when price falls supply of that commodity decreases.
The response of supply to a change in price is called the elasticity of supply.

Definition: -
The ration between the proportionate change in supply of a commodity and
the Proportionate change in the price is called the elasticity of supply.

Measurement of Elasticity Of Supply

TTTd There are three methods of measuring the Elasticity of supply.

1. Unit Method
This method of measuring elasticity of supply is divided into three categories as under.

I. Equal to Unity:-
When supply and price is equally change, is called that price elasticity of supply is equal to
unity. Y S
C
20
Price (P) Supply (Qs)
Price

B
10 20 Kg 15
X
15 30 Kg 10 10 20 30
40
20 40 Kg In the
5 above schedule, the price and quantity supply
increases with the same rate. With the help of schedule, A, B
and C curve are drawn, by joining these Oo points, SS supply curve is drawn through the origin
which shows that elasticity of supply is equal to supply.

II. Greater than Unity:-

If change in supply is more than the change in price, is called price elasticity of demand is
greater than one.

Price Supply (Qs) C

10 20 2o
B
15 40 15
Price

20 60
10

5
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O X
10 20 30 40 50 60
Supply

In the above schedule, Qs increases with greater ratio as compared to change in price. With the
help of schedule A, B, and C points are drawn. By joining these points we get supply curve
which bends towards X – axis, it shows that elasticity of supply is greater than unity.

III. Less than Unity:-

If change in supply is less than the change in price, is called price elasticity of supply is less than
unity. S
30
Price Supply C
25
10 20
Price

B 20
20 30
15
30 4o C
10

S
O X
10 20 30 40
Supply
In the above schedule, Qs increases with less ratio as compared to change in price. With the
help of schedule we get A, B and C points and SS curve is moving to Y-axis which shows that
elasticity of supply is less than unity.

2. Percentage Method

i. Equal to Unity:- When the percentage change in supply is equal to the percentage
change in price, then the elasticity of supply is the equal to unity.
ii. More than Unity:- When the percentage change in supply is less than the percentage
change in price, then the elasticity of supply is more than unity.
iii. Less than unity:- When the percentage change in supply is less than the percentage
change in price, then the elasticity of supply is less than unity.

3. Mathematical/Formula Method
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The proportionate change in supply due to proportionate change in price of a good is

called elasticity of supply.

Proportionate change in quantity supplied

Proportionate change in price

Price (P) Supply (Qs )

10 20
15 30

P= 10, P1= 15 Q=20, Q1= 30

∆ P= P1 – P = 15- 10 =5 ∆ Q=Q1 - Q = 30 - 20 = 10

∆ Q P 10 10 100
Es= × = × =
∆ P Q 5 20 100 =1