Objectives

After completing this unit, students will be able to:

• Define supply and its principles

• Understand the law of supply

• Explain the concept of elasticity of supply

Concept of Supply

Supply is defined as the total amount of products, goods or services available in the market at any given price. It is related to the demand
for a good at a certain price, given that all else remain constant. If the price increases, there will be more producers, as the objective of a
business is to make profit. If the market has buyers available, there will be producers willing to sell the product. Once the supply increases,
the prices will come down, provided that the demand remains the same. In an ideal situation, the supply equals demand.

According to the figure, when the price rises from

60 to 80, the quantity increases from 500 to 700

Figure 11.1: Relationship between Supply and Quantity

Law of Supply

According to the law of supply, if the price of a commodity increases,

the supply also increases, subsequently keeping other things Decrease Increase
constant. It further defines the relationship between demand, price, in Supply in Supply

and quantity.

Higher prices will lead to higher profits.

Figure 11.2 shows the supply curve and the movement along the
same. The change in price results in an increase or a decrease in
supply, and this is called “Movement along the supply curve.” The
shift in curve shows the increase and decrease in supply when other
factors change and price remains constant.
Figure 11.2: Source: Shifts in Supply Curve
When we add all the individual supply curves, we get the market
supply curve. When any factor other than price changes, one witnesses a shift
in the supply curve. A shift towards the left indicates that with the
decrease in supply, the producers sell a smaller quantity at the
same price.
Determinants of Supply

Cost of production:
If the factors affecting the cost of production lead to an increase in prices, the supply will decrease, as the producers can’t afford to produce at the
old prices. For example, the cost of building a house also increases with the increase in the cost of its raw materials like bricks, cement, wood, etc.

Natural Disasters Subsidies

Floods and other natural calamities Subsidies are the cash grants given by the
reduce the supply. government to boost the production of a
certain sector. If subsidies are provided,

Determinants cost reduces and supply increases.

of Supply
Taxes and Subsidies New Technology

Tax on a firm will increase the cost, New technologies help to cut down
as its supply will decrease. costs for the producers, and the
prices decrease as well.
Elasticity of Supply Please refer to the following degrees of responsiveness:

Price Elasticity of Supply & Five Elasticity Alternatives of the Supply

Elasticity of supply refers to “the degree of responsiveness of
Curve
quantity supplied to the change in price.”
Alternative Coefficient (E)
It is measured as: Perfectly Elastic E=∞
% Change in quality supplied Relatively Elastic 1<E<∞
Es =
% change in price Unit Elastic E=1
Hence, Relatively Inelastic 0<E<1
Es Perfectly Inelastic E=0
=∆Q/Q =∆Q/ ∆P x P/Q
∆P/P

Price

Price
S
Po S

Quantity Quantity
Perfectly Elastic Relatively Elastic
 Types of Elasticity of Supply
Price

Price
S S

Similar to the elasticity of demand, there are five types of elasticity

1 of supply.

Perfectly Elastic: The elasticity of supply changes to infinity but

the price change is almost nil. An infinite quantity is supplied at
1 Quantity Quantity price P. But there will be no supply of this good if the price falls
Unit Elastic Relatively Inelastic below this level, even if the fall is very small.
Price

Figure11.4: Perfectly Elastic Supply

Figure 11.4 shows the supply curve parallel to the horizontal

Quantity
axis. With the smallest change in price, there is an infinite change
Perfectly Inelastic
in supply, and this phenomenon is called perfect elasticity.
Figure 11.3: Types of Elasticity
Relatively Elastic: The supply is relatively elastic when a Unit Elastic: When the percentage change in quantity supplied
small change in price leads to a large change in quantity. In is the same as the percentage change in price, it results in a
other words, the percentage change in price is more than the straight line, starting at the origin, depicting unit elastic supply.
percentage change in quantity. This indicates that the product has close substitutes.

Figure 11.5: Relatively Elastic Supply

Figure 11.5 shows the increase in the price from P1 to P2, which Figure 11.6: Unit Elastic Supply

leads to an increase in quantity, Q1 to Q2, thereby increasing the Figure 11.6 depicts that the change in quantity supplied is the
supply, S. same as the change in price.
Relatively Inelastic: When the change in quantity supplied is Perfectly Inelastic: When any change in price results in an
less than the change in price, it results in a relatively inelastic infinite change in supply, it is called perfectly inelastic supply.
supply curve. It depicts that a small change in price results in a
smaller change in quantity supplied.

Figure 11.8: Perfectly Inelastic Supply

Figure 11.7: Relatively Inelastic Supply

Figure 11.7 depicts that the change in price is greater than the
change in quantity supplied.
Factors Influencing the Elasticity of Supply • Barriers to Entry:
If he entry is restricted for the new firms into the market, the
• Time Factor:
supply will be inelastic. For example, it is not easy to set up a
It is only in the long run that the supply is more elastic. In the
solar lamp manufacturing factory, as the prices and competition
short run, it is somewhat elastic, because the resources need
from the Chinese solar lamps are already very tight.
to be reallocated and that takes time. In the long run, it is more
elastic, because the factors of production become variable in • Nature of Good:
nature. For example, a farmer may grow vegetables on his land, Availability of substitutes is the most important factor because
but the rice fetches him a better price. So, he will have to wait for the production of a certain product takes various kinds of
the sowing season. resources. A company may want to shift to producing organic
foods, as there is an increasing demand for them. However,
• Ability to Store and Process the Product:
the raw material required is scarce, as there are few suppliers
If the warehouses are easily available, the supply is elastic and
and the land needs to be left chemical-free for 3 years to grow
vice versa. Agricultural produce requires proper warehousing,
organic produce. Hence, there are no substitutes.
which is not available in India. Hence, the prices of tomatoes
increase during rainy season as the farmers do not have proper
warehouses and consequently, the tomatoes rot very quickly. As
a result it becomes important for the farmers to raise the price
of tomatoes and incur the losses.
Summary
• Supply refers to the quantity of a product in
the market at any given price.
• According to the law of supply, the quantity
supplied increases with the increase in price
and vice versa.
• Other factors of production include time,
cost of technology, new technology, natural
calamity and increase in taxes and subsidies.
• Price elasticity of supply refers to the degree
of responsiveness of the change in quantity
supplied to the change in price.
• Different degrees of elasticity of supply include
perfectly elastic, perfectly inelastic, relatively
elastic, relatively inelastic and unity elasticity.
Assessment Questions
1. Why does the supply curve slope move
upwards?
2. Which are the different elasticities of supply?
Explain them.
3. Imagine if you are the owner of a firm producing
the parts for AC and cars. How would you
allocate your resources around the year?
4. How is the supply affected by production
factors in the following industries:
a. Semiconductor Chips
b. Oil Drills
c. Cereals