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Elasticity of Supply
Features Of Supply :
Supply is always expressed in terms of price.
Supply is a flow because it is measured over a period of time
Individual supply schedule Market supply schedule
Price Of Units
increasing the quantity of the product sold. 6
₰ Note : 4
1000
100
200
300
400
500
600
700
800
900
≡ (ii) goal of the firm should not change, (iii)
Supply Units
input prices & taxation policies should remain
same.
Price of the goods
Price of related goods
Goals of the firm
Input price/ factor price/ cost of
production
State of technology
No. of producers
Future expectations regarding
change in price
Govt. policies ,Taxes & subsides
others
1 . Price of the goods: Other things being equal, the higher the relative price of a good the
greater the quantity of it that will be supplied. This is because goods and services are
produced by the firm in order to earn profits and, ceteris paribus, profits rise if the price of
its product rises.
2 . Prices of related goods : If the prices of other goods rise, they become relatively more
profitable to the firm to produce and sell than the good in question. It implies, that, if the
price of Y rises, the quantity supplied of X will fall. For example, if price of wheat rises, the
farmers may shift lands to wheat production and away from corn and soyabeans.
3 . Prices of factors of production : A rise in the price of a particular factor of production will
cause an increase in the cost of making those goods that use a great deal of that factor
than in the costs of producing those that use relatively small amount of the factor. For
example, a rise in the cost of land will have a large effect on the cost of producing wheat
and a very small effect on the cost of producing automobiles. Thus, a change in the price
of one factor of production will cause changes in the relative profitability of different lines
of production and will cause producers to shift from one line to another and thus supplies
of different commodities will change.
4 . State of technology : The supply of a particular product depends upon the state of
technology also. Inventions and innovations tend to make it possible to produce more or
better goods with the same resources, and thus they tend to increase the quantity supplied
of some products and to reduce the quantity supplied of products that are displaced.
6 . Other Factors : The quantity supplied of a good also depends upon government’s industrial
and foreign policies, goals of the firm, infrastructual facilities, market structure, natural
factors etc
SUPPLY FUNCTION
Y S2 S
Y S S1
Price
Price
P
P
S2
S
S1 S
Increases Decrease
O Q Q1 X Qty O Q Q1 X Qty
ж Def. Change in quantity supplied due to change of the price in same
given supply curve of the commodity.
There are two types of movement of it.
Price P3
Extension
P1
P2
S
Contraction
O Q2 Q1 Q3 X Qty
price &quantity relationship- as
far as ceteris paribus is
concerned price & quantity
supplied have positive relation
due to the fact that producers
have the objective of profit
maximization so at a given cost
per unit of output the producer
will have more incentive to
supply more at a higher price.
Rise in price of other good-if the
price of good Y rises in
comparison to good X then the
producer will have more
incentive on producing the
former so he will devote more of
his resources for it’s production.
Law of diminishing marginal returns-this law
states that in the short run if we go on
increasing a factor of production by keeping
other factors of production constant then
the marginal(incremental) output will
decrease per unit of input , as a result of
which the average and marginal cost of
production will rise thereby inducing
producer to produce more of goods at a
higher price to cover it’s additional costs.
For e:g consider a small cafe which has
fixed resources(capital) if we go on
increasing the no of workers no doubt the
production will increase initially, but at
some point of time each succeeding worker
will contribute less than his previous one, NOTE: this law only
this is because as we go on increasing the operates in short-run ,in
no.of workers due to limited resources each the long-run all factors of
worker tries to get in others way and the production are variable.
overall efficiency of each succeeding worker
becomes less than his previous one thereby
contributing less and hence the average &
marginal cost of production rises.
The law of supply does not operate in certain
kind of goods
1-products which are fixed in supply e:g rare-
paintings, antiques , old-age coins.
2-agricultural produce- crops or vegetables which
are cultivated in a particular season like paddy
in monsoon.
3-prestige goods-high fashioned luxury items
meant for special class of people.
4-speculation-in case of speculation the law fails
to operate as the speculator in case of rising
market does not sell his stock even if the prices
are rising as because he thinks that the prices
will still rise in near future.
There are two exceptions to law of supply. They are,
(ii) Supply is a flow. The quantity supplied is ‘so much’ per unit of time, per day, per
week, or per year.
Law of supply tells us that producers will respond to a price drop
by producing less, but it does not tell us how much less. The
degree of sensitivity of producers to a change in price is
measured by the concept of price elasticity of supply.
100 Quantity
$
5 2. ...leads to 10% increase in
Quantity.
$4
100 Quantity
110
3. Unit Elastic Supply - Elasticity equals 1
Price
1. At any price
above $4, quantity
supplied is infinite.
$4 Supply
2. At exactly $4,
producers will
supply any quantity.
Q
Time Period In Case Of Supply
Y S
Price P3 Y S
Price
P1 S
O X Qty
P2
O Q X Qty
Supply = Constant, Supply Curve Is Supply Curve In This Case Will Be
Straight Line
Very From
Short X-Axis
Period Upward Sloping Originating From X –
Short Period
Example : All Perishable Goods Axis.
Example : Fruits, Vegetables, Bakery
Products
(i)
Y S
Y Price
Price ` S
S S
O X Qty O X Qty
Supply Curve In This Case Will Be Supply Curve In This Case Is Almost A
Upward Sloping, Originating
Long Period From Y – HorizontalVery
Straight
LongLine Originating From
Period
Axis Y – Axis.
Examples : Clothes, Utensils Etc. Example : Electronic Goods, Furniture Etc.
.
Equilibrium Price
Equilibrium refers to a market situation where
quantity demanded is equal to quantity supplied.
The intersection of demand and supply
determines the equilibrium price. At this price the
amount that the buyers want to buy is equal to
the amount that sellers want to sell. Only at the
equilibrium price, both the buyers and sellers are
satisfied. Equilibrium price is also called Market
clearing price
PRICE QNT QNT Impact on
Demanded Supplied price
5 16 31 down
4 12 25 down
3 19 19 Equilibrium
2 25 12 up
1 31 16 up
Y
S
D
EQUILIBRIUM PRICE
3 E
Price
S D
O 19 X
Quantity