LEARNING OUTCOMES At the end of this Unit, you should be able to Explain the meaning of supply List and provide speci ind provide specific examples of determinants of su Describe the law of supply ply and elasticity of supply De enci scribe the difference between movements on the supply curve and shif of the supply curve Explain the concept of elasticity of supply with examples. Illustrate how the concepts of demand and supply can be used to determine Meaning of Supply The term ‘supply’ refers to the amount of a good or service that the producers are willing and able to offer to the market at various prices during a given period of time. The term supply shows the following features: Supply of a commodity is always with reference to a Price. Supply of a commodity is to be referred to In /en period of time Supply of a commodity depends on the Ability of seller to supply a commodity However, ability of a seller to supply a commodity depends on the stock available with him, odity also depends on the Willingness of seller to supply a commodity. A seller's .e between the reservation price and the Supply of a comr willingness to supply a commodity depends On the differe prevailing market price. Three important points apply of supply: @ (ii) (iii) Supply is a flow. Supy per unit of time, per day, per week, or per year. . Supply refers to what a firm offer for sale in the market, not necessarily to what they succeed in selling. What is offered may not get sold 10 supply. Production cost is often the primary Supply requires both willingness and ability influence on ability. ply is identified fora specified time period. The quantity supplied is ‘so much’Questions for Practice Queetion Tee quantity supplied of 5 goed or cen @) ‘ice is the amount that 4s actually bought during a given time (&) producers wi (©) Period at a given price ish they could sell at a higher price Producers plan to sell during a given time period ata given pric (4) people are wi a ‘Ming to buy during a given time period ata given price Question — Supply isa ____ concept. (@) Stock —(b) Fy low and Stock (©) Flow (@) None of the above o inants of Supply : Although price is an important consideration in determining the willingness and desire to part with pote there are many other factors which determine the supply of a product or a service, These are liscussed below . Price of the Commodit * Other things being equal the supply of a commodity is DIRECTLY related with its price. + Itmeans that, larger quantity of a commodity is offered for sale at higher price and vice versa. . This is because the profits of the firm increases if the price of its product increases. . Price of the Related Commodities : The supply of a commodity also depends on the prices of related commodities i.e. substitute goods and complementary goods. ‘Other things being equal, if the price of a substitute goes up, the firms will be tempted to produce that substitute to get higher profits. Example ~ If the price of coffee rises, the firm would reduce the quantity supplied of tea. © Onthe other hand, other things being equal/if price of a complementary good goes up, the supply of the product in question also rises. Example ~ If the prices of fountain pens rise, it may cause an increase in the supply of ink. : Prices of factors of Production 3 st luc cost of production itself depends © Supply of a commodity depends on the cost of production. The p upon the prices of various factors of production ®he price any factor of production ri , the product level of output (and vice Production costs would be higher forthe same tsa), Hence the supply will tend to decrease a fall inthe cost of production tends to increase the supply, * Conversely, State of technology : * Achange in technology affects the supply ‘of commodity. A technological progress and improvement in the methods of production increases Productivity, Feduce the cost of production and increases the profits. As a result more is produced and supplied Also discoveries and innovations bring new variety of goods. Objectives of the firm : The objectives of the firm and business policy pursued by it also affect the supply of the product produced by it Some firms believes in higher margin of profits and lower tumover while others believe in lower margin of profit and higher turnover (Le. sales) to capture the market or to improve status, goodwill and prestige in the market Government Policy: « The supply of a commodity is also affected by the economic policies followed by the Government. ¢ The Government may impose taxes on commodities in the form of excise duty, sales tax and import duties or may give subsi Any increase in such taxes will raise the cost of production and so the quantity supplied wil fl Under such conditions supply will increase only when its price in the market rises Subsidies reduce the cost of production and thus encourages firms to produce and sell more. Expectations: : aes the product now or later depends on expectations of future Prise selling ; cipated future price of a good or “hoices of firms in respect o} ; S 5 with future prices. An increase in the anti ramen a in future, more will be supplied now. dif sellers expect a fall in pric service reduces its supply today; Se more. Besides, entry of new firms, either. nthe market, supply will be m ye to shift rightwards. « or foreign, causes the industry supply cur to shift rig! 3 If there are large number of firms 1 domesti. Time: Supply is a function of time also apparatus and the supply can be fully adjusted to demand, . Other Factors Supply of a Ply Of a commodity also depends upon Natural conditions like rainfall, temperature, etc. and foreign policies, infrastructural facilities; War, market structure; et, ei Questions for Practice Question An increase in the number of sellers of bikes will increase the (@) The price of a bike ©) Dene one (c) The supply of bikes (4) Demand for helmets Question Which of the following statements is correct? (a) When the price falls the quantity demanded falls (b) Seasonal changes do not affect the supply of a commodity (©) _ Taxes and subsidies do not influence the supply of the commodity (a) With lower cost, it is profitable to supply more of the commodity Relation between supply and factors affecting supply (Summary) Factors affecting individual supply Relation between supply & factor [Price ~ [Positive | Stock | Positive Taine ae Pe Positive Relation Cost of Production Inverse Relation Tmproved Techniques of Production | Positive Relation [Infrastructure Positive/Inverse Relation ‘Weather conditions Positive/Inverse Relation | Positive/Inverse Relation Taxation policy Positive/Inverse Relation Monetary Policy are ® pera set ———~T Positive/Inverse Relation [Wwatural Resources esa esThe Law of Supply: © The law of supply is explained by Dr. Alfred Marshall Law of Supply express the nature of functional relationship between the Price of a commodity and its quantity supplied “The Law of Supply states that at a higher price seller will supply more and ata lower price seller will supply less. » Thus, there is DIRECT RELATIONSHIP between supply and price. » Its assumed that other determinants of supply are constant and Only price is the variable and influencing factor. Thus, the law of supply is based on the following main assumptions:- ‘* _ Cost of production remains unchanged even though the price of the commodity changes. © The technique of production remains unchanged. * Government policies like taxation policy, trade policy, etc. remains unchanged. © The prices of related goods remains unchanged. The scale of production remains unchanged etc. The law can be explained with the help of supply schedule and a corresponding supply curve. A supply schedule s the tabular presentation of the law of supply. It shows the different prices of a commodity and the h fesentation of the la responding quantities that suppliers are willing to offer for sale, with al other variables held constant 25 2 ies thats 2 The supply curve Is a graphical presentation of the supply schedule. The supp! between the qi supplied and the price. us a relationship between the quantity supp! e supply curve is th ~ Quantity supplied (ks) Price (Rs) (per ka) ie alQuanity Supplied Fig. 1 : Supply Curve = Important note = Features of Supply curve (1) Supply Curve slopes upwards from left to the right. (2) Supply Curve is positively sloped. (3) Supply Curve may be sometimes a straight-line or sometimes a free hand curve (4) The sloping of the Supply Curve explains the Law of Supply, which describes a direct Price-Demand relationship. summation (totalling) of Individual Supply Curves of all Producing (5) The Market Supply Curve is a lat Firms, and also slopes upwards from left to the right. Quanty Fig. 2 © ‘The market supply, s ch seller at different prices. 5 of various firms. e supplied by €2 It is derived by adding the quantity SuPP can be obtained by adding horizontally the supply curves “The market supply curve for XTypes of Supply Elasti TE ee | cit The ela f suppl © elasticity of supply can be classified as und as under: () Perfectly inelastic supply: (Bs = 0,) If as a result of a char ‘a change in price, the , the quantity supplied of a e1 Example — If price rises by 20% i 6 and the quantity supplied remains unchanged then E, = 020 = 0 In this case, the supply cury s yc c ply curve is a vertical straight line curve parallel to Y-axis as shown in the figure. Price ee lesa lh # Quantity Supplied Fig. 5: Supply Curve of Zero Elasticity (ii) Relatively less-elastic supply: 0< Es <1 When a big change in price leads to small change in quantity supplied, then supply is said to relatively inelastic or less elastic. If price rises by 30% and supply rises by 10% then, E, = 10/30 = 1/3 ent of elasticity would be somewhere between ZERO and ONE. The supply curve in steep slope as shown below a Quantity Supplied Fig, 6 : Showing Relatively Less Elastic Supply >): jo be mi riba F Relatively greater-elastic supPIY ; w 1 chi price leads to big change 1 aus ry supplied, then the supply '$ aid hen a small change in price lea relatively or more elasticfpreeneett y 10% and Th Supply rises WY elastic supply curve is flatter as sh 3s by 30% then, 30 Es = 30/10=3>1 1own below- 4 E> bles 30 a x Quantity Supplied units) | i Fig. 7 : Showing Relatively Greater Ela WV) Unit-Elastic(Es = 1). Supply The pe percentage change in quantity is equal to the percentage change in price. Unit elasticity is esse city is essentially a dividing line or boundary between the elastic and inelastic ranges Price ° oe ‘Quantity Supplied (units) Fig. 8: Showing Unitary Elasticity (v) _ Perfectly elastic supply: (Es = &): When with no cl yy extent, the supply is said to change in price, the supply of a commodity expands or Jhange in price or with very ltt the supply is a horizontal contracts to an! be perfectly elastic. In this case, straight line and parallel to X-axiso (QRROMEENRSS Quantity Supplied (nits) Fig. 9: Supply Curve of Infinite Ela: Questions for Practice Question A vertical su al supply curve parallel to Y parallel to Y axis implies that the elasticity of supply is, (a) Zero (b) Infinity (©) Equal to one (4) Greater than zero but less than infinity uestion A horizontal supply curve paralle Qi horizontal supply curve parallel to the quantity axis implies thatthe elasticity of supply 1s (a) Zero (b) Infinity (©) Equal to one (a) Greater than zero but less than infinity Question Elasticity of supply is greater than one when (a) Proportionate change in quantity supplied is more than the proportionate change in price (&) _ Proportionate change in price is greater than the proportionate change in quantity supplied (c) change in price and quantity supplied are equal (@) None of the above = Measurement of supply-clasticit The different methods of measuring Price elasticity of supply are «The Percentage or Ratio oF Proportional Method, The Point or Geometric Method, and «The Are Method(1) The Percentage Method: ‘Thus method is based on the definition of elasticity of supply. The coefficient Of price elastic 's measured by taking ratio of percentage change in supply to the perc ity of supply entage change in price. Thug Price, measure the elasticity by using the following formula ay * Ifthe coefficient of above ratio is equal to One, the supply will be unitary If the coefficient of above ratio is More than one, the supply is relatively elastic If the coefficient of above ratio is Less than one, the supply is relatively inelastic, Question If price of computers increases by 10% and supply increases by 25%, The elasticity of supply is (a) 25 (b) 04 © ©25 @ joa . Point elasticity Method of der The elasticity of supply can be considered with reference to a given point on the supply curve or between two points on the supply curve Point-elasticity of supply can be measured with the help of the following formula. Pee 2G Example : - ind sticity of supply using point method, The Supply function is given as q = -100 + 10p. Find the elasticity of supp when price is Rs 15. Solution : PP dp 4 5 +10(15) since {2 =10,p=Rs. 15,q=— 100+ 10(15) dp q=50 15 =10* 50 Ordp Where — is differentia e a tiation of the supply function with respect to price and and p and and quantity respectively =a Arc-Elasticity: Arc-elasticit e. ela asticity i.e. elasticity of supply between two prices can be f help of the following formula: pier: Q@-Q Q+Q Where P; Q, are original price Qrare al price and quantity and P2 Q2 are new price and quantity supplied, 20 units and Thus, if we have to find elasticity of supply when P; = Rs. 12, P2 = Rs. 15, Q ct supply elasticity as Q = 50 units. Then using the above formula, we will Determinants of Elasticity of Supply Following are the general determinants of elasticity of supply (1) If increase in production causes substantial increase in costs, producers will Rave less. se to increase in price and therefore, price ‘ease quantity supplied in respon incentive to in clasticity of supply would be less. If there are constant costs or negligible ise tm coS put increases, supply will be elastic. Products that involve more complex production processes or require relatively longer time to produce exhibit lower elasticity of supply. For example the supply of airerafts and cruise ships is less elastic compared to supply of motor bikes. responsive the quantity supplied to changes i Price e more yw sellers sufficient (2) The longer the period of time, th A shorter time period does not alloy ater the supply elasticity. sions to changes in and alternatives and to adjust their production dec ns can build new plants or new firms may be able to enter the and the gre time to find resources ern price. In the long run, firm the supply market and inc G) Supply is more elastic when there 16 large number of producers and there is high degree of jasticity wer barriers of among them. Supply ¢l js also higher when there are fe competition entry into the market. are not working to full capacity. If spare production capacity t without a rise in costs. The Br i rms s, they can increase outpul Supply will be elastic if fi ee reater the | ms (4) is available with the of suy(5) (O} (7) (8) (9), If key raw materials and inputs are easily and cheaply availabe, the le, t Supply will be clastic, ly curve is, ‘more elastic, the cost of production increases and. If drawing productive resources into the industry is easier, the sy i : b. ipl In case itis difficult to procure resources economically, supply will become less elastic. If firms have adequate stocks of raw materials, components and finished prod lucts, il be able to respond with higher supply as price rises. Generally, those mea a / ies can be easily and inexpensively stored without losing value may have elastic suppl oa y. The ease with which factor substitution can be made and the costs of such fact factor substitution also determine price elasticity of supply. If the factors of production used in the production of the commodity are commonly available and can be easily substituted or increased, then the firms will be able to produce quickly and respond to an increase in price. If a production proc 's involves use of materials which are in short supply, or those that take longer delivery period or which are highly specialized, then supply elasticity will be low. If the labour employed is scarce or are required to be highly skilled and specific and if they require longer training period, then elasticity of supply will be low, For example, physicians in healthcare industry and chartered accountants in accounting service. If both capil ‘al and labour are occupationally mobile, then the elasticity of supply for a product is higher than if capital and labour cannot be easily switched. For example, 2 printing press can easily switch between printing magazines and greeting cards. Similarly falling prices of a particular vegetable encourage farmers to switch to the production of another, Products which are more continuously produced have greater supply elasticity than those which are produced infrequently. Expectations about future prices also affect elasticity of supply. Expectation of substantial rise in prices in future will make the sellers respond less to a current rise in price Equilibrium Price ay Q) @) (4) Equilibrium means a market situation where the quantity demanded is equal to quantity supplied. Thus, the two factors determining equilibrium price are market demand and market supply. which the sellers of a good are willing to sell the quantity Equilibrium price is the price at " librium price (also called market clearing price) is the which buyers want to buy. Thus, equil price at which demand and supply are equal ‘At equilibrium price both sellers and buyers are satisfied. ‘At equilibrium price, there is neither SHORTAGE nor SURPLUS. So at equilibrium price, market is said to be CLEARED.Market Equilibrium and Social Efficiency The determination of market price isthe central theme of micro cconom economic theory is also called price theory v* smalyss. Hone, mic, The following table presents the concept of the equilibrium price Table 11: Supply and Demand Schedule Price (Rs) | Quantity Demanded | Quantity Supplied | Impact on price ees 6 31 Downward 4 2 25 | Downward 3 19 Panis) Equilibrium 2 25 | 2 Upward 1 Sree 6 Upward The equilibrium between demand and supply is depicted in the diagram below. Demand and supply are in equilibrium at point E where the two curves intersect each other. It means that only at price Rs. 3 the quantity demanded is equal to the quantity supplied The equilibrium quantity is 19 units and these are exchanged at price Rs 3. If the price is more than the equilibrium level, excess supply will push the price downwards as there are few takers in the market at this price and vice versa Price Supply i Demand Quantity Fig. 10: Equilibrium Price social xy represents the society frot a re made in a particular Social efficiency represents the net gains 10 socte y from all exchanges that ar consists of two components: consumer SurPIUS and producer surplus. 1c h 5; consumer § —————Prod rroducer surplus is the benefit derived by producers from the sale of a unit above and beyond their cost of producing that unit. This occurs when the price they receive in the market is more than th pare ca minimum price at which they would be prepared to supply. ; It is represented by the area above the supply curve and below the price line Consumer surplus is a measure of consumer welfare It is represented by the area above the demand curve and below the price line. or IConsume? {Sele Produ Surplus, 2 @ ‘i Quanity Exchanges Fig. 11: Equilibrium Price and Social Efficiency For all quantities below OQ, we find that there is a difference between the price that producers are willing to accept for supplying the good and the price that prevails in the market (P). Producer surplus disappears when market price is at equilibrium i. the price at which sellers are willing to offer for sale is equal to the price that they receive From figure 35, we find that at price P, when the market is in equilibrium, social efficiency is achieved with both producers and consumers enjoying maximum possible surplus.The market supply is governed by the law of supply and de individual producer's supply and, in addition, market ‘pends on all the factors that determine the on the number of producers of the commodity in the = Movements on the Supply Curve ~ Increase or Decrease in the Quantity Supplied Changes in Quantity Supplied OR Expansion & Contraction of supply OR Movement along a supply curve (2) When supply of a commodity changes only due to change in the price of commodity other determinants remaining unchanged, it is called changes in quantity supplied. * Changes in quantity supplied thus means -expansion of supply & contraction of supply * When price of a commodity rises, quantity supplied also rises. This is called expansion of supply. When price of a commodity falls, quantity supplied also falls. This is called contraction of supply (b) As other determinants of supply like price of related commodities, prices of factors of production, state of technology, etc. are assumed to be constant, the position of the supply curve remains the same. The seller will move upwards or downwards on the same supply curve. Price ° bw ‘Quanity Supplied Fig. 3 : Figure Showing Change in Quantity Supplied as a Result of Price Change Shifts in Supply Curve - Increase or Decrease in Supply R Increase and decrease in Supply OR Shift in Supply curve (8) ne ciaeces nee price of the commodity, it is ther than (@) When there is change in supply due to change 12 factors ot called changes in supply.cchnology, govt. polices, prices of elated 00d et . in supply means- increase 7 ‘ Ply means- increase in supply & decrease in supply. * Price remaining the c ing the same when supply rises due to change in factors othe called increase in supply, ae Likewise, price remaining the same when supply fills due t 0 change price, itis called de mn@e in factors other than ‘crease in supply (b) In this case the supply Supply curve shifts from its original position to al position to rightward when supply in and to leftward when supply decreases Feed * Thus, change in supply curv - hhus, chang Ply curve as a result of increase and decrease in supply, is technically called shift in supply curve 0 “ Increase in Supply Decrease in Supply y 8! / sag gr ~y £ f | si Vee Op. Oma Ones CI OMY Quantiy Quantity Fig. 4: Shifts in Supply Curves Questions for Practice Question When supply curve moves to the left, it means (a) _ lesser quantity is supplied at a given price (b) larger quantity is supplied at a given price (©) prices have fallen and quantity is supplied at a lower price (d) none of the above Question When supply curve moves to right, it means (a) supply increases and more quantity is supplied at a given price ® (b) supply decreases and less quantity is supplied at a given price (©) supply remains constant at a given price (@) none of the aboveQuestion — ThE SUPPly curve shifts to the ight because of @ improved technology (©) increased price of factors of production (©) increased excise duty @ all of the above Elasticity of Supply = Meaning ; Price clasticity of sup commodity to a chan, * Inother words, the elasticity of SupPly shows the degree of change in the quantity supplied in Fesponse to change in the price of the commodity * Elasticity of supply can be defined “as a Tatio of the percentage change in the quantity Supplied of a commodity to the percentage change in its ‘own price”, = Formula = Percentage change in quantity supplied Percentage change in Price Change in quantity supplied quantity supplied Change in price Price Where q denotes original quantity supplied Aq denotes change in quantity supplied. P denotes original price Ap denotes change in price Example s the price of commodity X increases from Rs 2,000 per unit to Rs 2a 'a) Suppose the price of comi ee : S ad quently the quantity supplied rises from 2,500 units to 3,000 units. Calculate the and consequently the quantity elasticity of supply 4q=500 units p= Rs.100 ® p=Rs. 2000 = 2500 units 500 2000 100-2500 Here