SUPPLY and Supply Elasticity
SUPPLY :- Supply refers to quantity of a commodity that a firm is willing and able to offer for sale at a given price during a given period of time.
- Individual Supply refers to quantity of a commodity that an individual producer is willing and able to offer for sale at a given price during a given period of time.
- Market Supply refers to quantity of a commodity that all the producers taken together are willing and able to offer for sale at a given price during a given period of time.
Supply and Stock
Stock refers to total quantity of a particular commodity that is available with the firm at a particular point of time. On the other hand, supply is that part of stock which a producer is willing and able to bring to the market for sale during a given period of time.
Supply Funtion
Supply function shows the functional relationship between quantity supplied for a particular commodity and the factors influencing it.
Sx= f (Px , Po, Pi , St ,T, G)
Where,
Sx= Supply of the given commodity x St= State of technology
Px= Price of given commodity x T = Taxes and subsidies in production
Po= Price of other goods G = Goals of the film
Pi = Prices of inputs
DETERMINANTS OF SUPPLY (INDIVIDUAL SUPPLY)
1 ) Price of the given commodity. The most important factor determining the supply of a commodity is its price. As a general rule, price of a commodity and its supply are directly related. This relationship is explained by the Law of Supply.
The following determinants are termed as ‘other factors’ or ‘factors other than own price’.
2) Prices of the other good: Increase in the prices of other goods makes them more profitable in comparison to the given commodity. As a result, the firm shifts its limited resources from production of the given commodity to production of other goods, thus reducing the supply of the given good.
There is an inverse relationship between price of the other good in production and supply of the given good.
3) Prices of inputs: If the prices of all or any of the factors of production or inputs increases the cost of production of the given good also increases. This decreases the profitability to the producer. As a result, seller reduces the supply of the commodity.
On the other hand, decrease in prices of factors of production or inputs, increases the supply due to fall in cost of production and subsequent rise in profit margin. There is an inverse relationship between price of inputs and supply of the given good.
4) State of Technology: Use of advanced and improved technology reduces the cost of production, which raises the profitability for the seller. It induces the seller to increase the supply. However, technological degradation or use of outdated technology increases the cost of production and reduces profit margin leading to a decrease in supply.
5) Taxes and subsidies in production: Increase in taxes on production raises the cost of production and, thus, reduces the supply, due to lower profit margin.
On the other hand, tax concessions and subsidies increase the supply as they make it more profitable for the firms to supply goods by reducing the cost of production or increasing revenue.
6) Goals / Objectives of the firm: Generally, supply of a commodity increases only at higher prices as it fulfills the objective of profit maximization. However, some producers are willing to supply more even at those prices, which do not maximise their profits. The objective of such firms maybe to maximise sales and capture a larger share of the market.
Determinants of market supply
Market supply is influenced by all the factors affecting individual supply. In addition, it is also affected by:
Number of Firms in the market: When the number of firms in the industry increases, market supply also increases due to large number of producers producing that commodity. However, market supply will decrease, if some of the firms start leaving the industry due to losses.
LAW OF SUPPLY
The law of supply states that there is a direct relationship between price and quantity supplied of a commodity keeping all other factors affecting supply constant.
As price rises, there would be an increase in quantity supplied of a commodity while a fall in price would result in a decrease in quantity supplied, keeping all other factors affecting supply constant. (ceteris paribus)
Assumptions of Law of Supply
By ‘keeping other factors constant or ceteris paribus’ , we assume the following:
- Price of other goods is constant.
- There is no change in the state of technology.
- Prices of factors of production remain the same.
- There is no change in the taxation or subsidies in production.
- Goals of the producer remain the same i.e. profit maximisation.
Reasons for Law of Supply
The producers, while supplying a commodity, aim to maximise profits. When price of a commodity increases, without any change in costs, it raises their profits. As a result, the producers would be willing to increase the supply of the commodity. On the other hand, with fall in prices, supply also decreases as profit margin decreases for the producer.
SUPPLY SCHEDULE
Supply schedule is a table showing various quantities of a commodity that a producer (or all producers taken together) is (or are) willing and able to supply at different prices, during a given period of time.
Supply schedule is of two types:
1. Individual supply schedule 2. Market supply schedule.
Individual Supply Schedule
Individual supply schedule is a table showing various quantities of a commodity that an individual producer is willing and able to sell at different prices, during a given period of time.
| Price (`) | Quantity supplied of good x (units) |
| 1 | 5 |
| 2 | 10 |
| 3 | 15 |
| 4 | 20 |
| 5 | 25 |
In the above schedule, quantity supplied of commodity X increases with increase in price. The producer is willing to sell 5 units of X at a price of `1. When the price rises to `2, supply also rises to 10 units.
Market Supply Schedule
Market supply schedule is a table showing various quantities of a commodity that all the producers taken together are willing and able to sell at different prices, during a given period of time.
It is obtained by adding all the individual supplies at each price.
| Price (`) | Individual Supply (units) | Market Supply (units) (SM = SA+ SB) | |
| SA | SB | ||
| 1 | 5 | 10 | 5 + 10 = 15 |
| 2 | 10 | 20 | 10 + 20=30 |
| 3 | 15 | 25 | 15 + 25= 40 |
| 4 | 20 | 35 | 20 + 35= 55 |
| 5 | 25 | 40 | 25 + 40= 65 |
Suppose there are only 2 producers A and B in the market for a given good X. The market supply is obtained by adding the quantity supplied by A and B at different prices.
At price of `2, quantity supplied by A (SA) is 10 units while that by B (SB) is 20 units, hence market supply (SM) is 10 + 20 = 30 units.
SUPPLY CURVE
Supply curve refers to a graphical representation of supply schedule where each point on the curve shows the quantity of a commodity that a producer (or all producers taken together) is (or are) willing to sell at a given price, during a given period of time.
- It shows the direct relationship between price and quantity supplied, keeping all other factors affecting supply constant.
- Like supply schedules, supply curves can also be drawn both for individual producer and for all the producers taken together in the market. So, supply curve is of two types:
1. Individual Supply Curve 2. Market Supply Curve
Individual Supply Curve
Individual supply curve refers to the graphical representation of individual supply schedule where each point on the curve shows the quantity of a commodity that an individual producer is willing and able to sell at a given price, during a given period of time.
• At price `15, quantity supplied is 10 units while at `30, it is 30 units showing a direct relationship between price and quantity supplied of the good keeping all other factors affecting supply constant.
Market Supply Curve
Market supply curve refers to the graphical representation of market supply schedule where each point on the curve shows the quantity of a commodity that all producers taken together for that commodity are willing and able to sell at a given price, during a given period of time.
It is obtained by horizontal summation of individual supply curves.
Suppose there are only 2 sellers A and B in the market for a given good X say books. The market supply curve is obtained by horizontal summation of individual supply curves of A and B at different prices.
At price `20, quantity supplied by A is 3 units (AB) while that by B is 4 units (CD). Hence at `20, we get the market supply as AB + CD= AD (3+4 =7 units)
Similarly, the market supply curve SSM is obtained by horizontal summation of individual supply curves SSA and SSB at each price.
Market Supply Curve is Flatter
Market supply curve is flatter than all individual supply curves. It happens because with a change in price, the proportionate change in market supply is more than the proportionate change in individual supplies.
Slope of Supply Curve
- Due to direct relationship between price and supply, the supply curve slopes upwards. So, slope of supply curve is always positive.
- Slope of supply curve measures the flatness or steepness of the supply curve.
(SUPPLY and elasticity )
Movements along the supply curve (change in quantity supplied)
When quantity supplied of a commodity changes due to change in its own price, keeping other factors affecting supply constant, it is known as ‘change in quantity supplied’.
It is graphically expressed as a movement along the same supply curve. There can be either a downward movement (Contraction in supply) or an upward movement (Expansion in supply) along the same supply curve.
• Downward movement along the supply curve (Contraction in supply)
- When the quantity supplied falls due to a decrease in the own price of a commodity, keeping other factors affecting supply constant, it is known as contraction in supply.
- It is also called ‘Decrease in quantity supplied’.
- Quantity supplied falls from OQ to OQ1 when own price of the commodity falls from OP to OP1, keeping all other factors affecting supply constant.
- There is a downward movement along the supply curve from A to B
• Upward movement along the supply curve (Expansion /Extension in supply)
- When the quantity supplied rises due to an
increase in the own price of a commodity, keeping other factors affecting supply constant, it is known as expansion in supply.
- It is also called ‘Increase in quantity supplied’.
- Quantity supplied rises from OQ to OQ1 when own price of the commodity rises from OP to OP1, keeping all other factors affecting supply constant.
- There is an upward movement along the supply curve from A to B
(SUPPLY and elasticity )
Shifts of the supply curve (change in supply)
When supply of a commodity changes due to change in any of the other factors affecting supply keeping own price constant, it is known as ‘change in supply’.
• Rightward shift of supply curve (Increase in supply)
• Increase in supply refers to a rise in the supply of a commodity caused due to a favourable change in any of the factors affecting supply other than own price of the commodity.
Supply curve shifts towards right from SS to S1S1 due to:
- Decrease in price of other goods.
- Decrease in price of factors of production (inputs).
- Advancement or improvement in technology.
- Favourable taxation or subsidies policy (decrease in taxes or increase in subsidies).
- Increase in number of firms.
• Leftward shift of supply curve (Decrease in supply)
• Decrease in supply refers to a fall in the
supply of a commodity caused due to an unfavourable change in any of the factors affecting supply other than own price of the commodity.
Supply curve shifts towards left from SS to S1S1 due to:
- Increase in price of other goods.
- Increase in price of factors of production (inputs).
- Obsolete or outdated technology.
- Unfavourable taxation or subsidies policy
(increase in taxes or decrease in subsidies).
- Decrease in number of firms.
Expansion in Supply Vs Increase in Supply
| Expansion in Supply (Increase in Quantity Supplied) | Increase in Supply | ||||||||||||
| When the quantity supplied rises due to an increase in the own price of the commodity, keeping other factors affecting supply constant, it is known as expansion in supply.
It occurs due to increase in price of the given commodity.
|
Increase in supply refers to a rise in the supply of a commodity caused due to a favourable change in any of the factors affecting supply other than own price of the commodity.
It occurs due to other factors like decrease in the price of inputs, decrease in taxes on production, technological upgradation etc. |
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| There is an upward movement along the same supply curve. | There is a rightward shift of the supply curve. | ||||||||||||
When price rises from `10 to `12 quantity supplied increases from 100 units to 150 units. |
Price remaining same at `10, supply increases from 100 units to 150 units. |
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When price rises from OP to OP1, quantity supplied increases from OQ to OQ1 keeping all other factors affecting supply constant. There is an upward movement along the supply curve from A to B. More is supplied at a higher price. |
At the same price OP, supply increases from OQ to OQ1. There is a rightward shift of the supply curve from SS to S1S1. More is supplied at the same price. |
PThe converse holds true in case of Contraction in Supply (Decrease in quantity supplied) and Decrease in Supply.
PRICE ELASTICITY OF SUPPLY (Es) (SUPPLY and elasticity )
Price elasticity of supply refers to degree of responsiveness of supply of a commodity with reference to change in its price.
For example, if price elasticity of supply is 2, it means that one percent fall in price leads to 2 percent fall in supply or one percent rise in price leads to 2 percent rise in supply.
Percentage method or Proportionate method
Elasticity is measured as the ratio of percentage change in the quantity supplied of a good to a percentage change in its price.
Elasticity is a ‘Unit Free’ Measure (SUPPLY and elasticity )
The coefficient of price elasticity of supply is a pure number and has no units.
Price Elasticity of Supply is always positive
Elasticity of supply will always have a positive sign because of the direct relationship between price and quantity supplied of a commodity.
| Type | Value | Description |
| Perfectly Elastic | (Es = ∞) | Infinite supply at same price |
| Elastic | (Es > 1) | % Δ in Quantity supplied > % Δ in Price |
| Unitary Elastic | (Es = 1) | % Δ in Quantity supplied = % Δ in Price |
| Inelastic | (Es < 1) | % Δ in Quantity supplied < % Δ in Price |
| Perfectly Inelastic | (Es = 0) | Quantity supplied remains same at all prices
(% Δ in Quantity supplied = 0) |
1. Perfectly Inelastic Supply (Es = 0)
When the supply does not change with change in price, then supply for such a commodity is said to be perfectly inelastic.
Here, the supply curve is a vertical straight line parallel to the y-axis.
2. Unitary Elastic Supply (Es = 1)
When percentage change in quantity supplied is equal to percentage change in price, then supply for such a commodity is said to be unitary elastic. Here, the supply curve is a straight line passing through the origin.
NOTE: All the supply curves, which pass through the origin are unitary elastic.
3. Perfectly Elastic Supply (Es = ∞)
When there is infinite supply at a particular price and supply becomes zero with a slight fall in price, then the supply of such a commodity is said to be perfectly elastic. Here, the supply curve is a horizontal straight line parallel to the x-axis.
(SUPPLY and elasticity