You are on page 1of 10

SUPPLY CURVE

Q) State and explain the Law of Supply. A) The law of supply states that, other things remaining unchanged, an increase in the
price of a product leads to an increase in the quantity supplied of it. It is because, higher the price, the more a producer wants to supply other things refer to other determinants of supply. Supply schedule: A supply schedule is a tabular statement which shows different quantities of a commodity offered for sale at different prices. The supply of pens by the producer at different prices is shown in the following hypothetical schedule. There should not be any change in technology, excise duties, input prices or prices of related goods. Supply Curve: A supply curve reflects graphically the quantity supplied of a commodity to its price. The above supply curve shows positive relationship between the price and supply of the commodity because with rise in price, the curve rises upward.

Q) Explain the factors on which supply of a commodity depends. Or what are the determinants of market supply? A) Determinants of Market Supply or Factors affecting Market Supply :
(i) (ii) Price of the Commodity : There is direct relationship between price and quantity supplied, i.e., with the increase in price, quantity supplied increases and vice-versa. Technological Changes : If the firm uses latest technology, marginal cost of the firm will decrease. As a result market supply will go up. The supply curve / MC curve will shift to the right. On the other hand, if the firm uses old technology, MC of the firm will increase. As a result market supply will fall. The supply curve / MC curve will shift to the left. Changes in input prices : If the input prices go up, MC of the firm will increase. As a result market supply will fall. The supply curve / MC curve will shift to the left. On the other hand, if input prices fall, MC of the firm will decline and market supply will increase. The supply curve / MC curve will shift to the right. Changes in Excise Rate : If the excise tax rate increase, MC of the firm will increase. Hence, market supply will decrease. As a result, MC curve/supply curve will shift to the left. On the other hand, if the excise tax rate decrease, MC of the firm will decline and the market supply will go up. The supply curve / MC curve will shift to the right. Changes in the prices of Related Goods : A producer can produced many related / substitute goods with the given amount of resources. For eg. a farmer can grow either rice or wheat on his land. If the price of wheat goes up, the farmer will produce less of rice. It will be more profitable for him to produce wheat. Thus an increase in the price of the substitute good in production will lead to the fall in the supply of the good in question. Its supply curve / MC curve will shift to the left. And a decrease in the price

(iii)

(iv)

(v)

of a substitute good in production shifts the supply curve of a good to the right.

Q) Define Market Supply. A) Market supply refers to the total quantity of a commodity offered for sale by all the
firms at a particular price at a point of time.

Q) Differentiate between extension and contraction in supply. OR Explain movement along a supply curve. A) When the supply of a commodity changes because of changes in price and not
because of other factors affecting supply like technological changes, input price changes, changes in excise tax, changes in the process of related goods in production etc., it is called extension or contraction in supply or movement along a supply or changes in quantity supplied. Extension / Expansion in Supply Contraction in Supply 1. When the quantity supplied increases 1. When the quantity supplied decreases with the increase in price, it is called with the decrease in price, it is called expansion in S.S. decrease in supply. 2. Here the moves upwards along the 2. Here we move downwards along the same supply curve. same supply curve. 3. Price Qty. SS 3. Price Qty. SS Rs. 10 20 Rs. 10 20 Rs. 20 50 Rs. 5 10

Q) Explain increase and decrease in supply or explain the shifts in supply curves or explain change in supply. A) When there is rise or fall in supply not due to changes in price but due to other
factors affecting supply the technological changes, input price changes, changes in excise tax rate or changes in prices of related products, it is called increase or decrease in supply. Here change in supply takes place and not change in quantity supplied and the supply curve shifts right or left.

1.

2.

3. 4.

Increase in Supply Here more quantity is supplied at the same price or same quantity is supplied at a lower price. Increase in supply takes place because of any of these factors : (a) fall in marginal cost due to technological advancement (b) fall in input process (c) fall in excise tax rate (d) fall in the prices of related goods in production. Here the supply curve shifts to the right. At the same price; more quantity supplied Price Qty. SS Qty. SS Rs. 10 20 30 At a lesser price, same quantity supplied. Price Qty. SS Rs. 10 20 Rs. 5 20

Decrease in Supply 1. Here less quantity is supplied at the same price or same quantity is supplied at a higher price. 2. Decrease in supply takes place because of any of these factors : (a) increase in MC due to bad technology (b) increase in input prices (c) increase in excise rate (d) Increase in prices of substitute goods in production 3. Here the supply curve shifts to the left. 4. At the same price; less quantity supplied Price Qty. SS Qty. SS Rs. 10 20 10 At a higher price same quantity supplied. Price Qty. SS Rs. 10 20 Rs. 20 20

Q) Prepare a market supply schedule and market supply curve. A) A supply schedule is a tabular statement showing different quantities of a commodity
offered for sale at different prices. As against it, a market supply schedule reflects total of various quantities of the commodity offered for sale by all individual firms at different prices. Thus, market supply is obtained by aggregating the supplies of all firms selling that commodity at different prices. Market supply schedule is the horizontal summation of individual supply schedules. Let us assume there are three firms, namely A, B and C in the pen market. Individual supply schedules and the resultant market supply of pens are shown below :

Price (Rs.) 2 4 6 8 10

Firm-A 10 20 30 40 50

Individual Supply Schedules Firm-B Firm-C 20 30 30 40 40 50 50 60 60 70

Market Supply (A + B + C) 60 90 120 150 180

Individual and Market Supply Curves: A supply curve is graphical representation of supply schedule. Accordingly individual supply curves reflect individual supply schedules whereas market supply curve represents market supply schedule. Market supply curve is obtained by horizontal summation of all individual supply curves.

Assume that there are two firms in an industry, A and B. In the below figure, the curves SA, SB and SA+B respectively denote AS supply curve, BS supply curve and the market supply curve. For example, at price P1 the producer A supplies A1 units and the producer B supplies B1 units. The total quantity supplied to the market is then A1 + B1, shown along the SA + B curve against the price. Similarly, at P2, the total quantity supplied is A2+B2, where A2 and B2 are quantities supplied by producers (firms) A and B respectively. All other points on the market supply curve are derived in the same manner. An increase in the number of firms (competition) shifts the supply to the right and viceversa.

Q) What is market period? A) In the very short-period, the firm will not be able to increase the factors of
production like machines, buildings, structures, top management etc. The production level in a very short-period of time is given, irrespective of whether price goes up or goes down. The resulting supply curve will be a vertical line as shown. Such a short period is called the market period in economics. By definition, it is that short a period within which firms cannot adjust their output to any change in price. As a result, the supply curve of a firm or the whole industry is vertical.

Q) What is meant by a change in quantity supplied? A) A change in quantity supplied refers to a movement along a given supply curve
because of price change. For eg. if price increases, Qty. SS increases and the SS curve moves upwards.

Q) What is meant by change in supply? A) A change in supply means a shift of the supply curve due to change in factors
affecting supply other than price like technological advancement, change in input prices or excise tax rates etc. For eg. if excise taxes go up, the supply curve shifts to the left and vice versa.

Q) What effect does a cost saving technical progress have on the supply curve? A) It will shift the supply curve to the right. Since MC falls, supply will increase and the
SS curve shifts to right.

Q) What effect does an increase in input price have on the supply curve? A) Supply curve will shift to left because with the rise in input prices MC will rise and
supply will fall.

Q) What effect does an increase in excise tax rate have on the supply curve of the product? A) It will shift the supply to the left since MC goes up and the supply will fall. Q) If a farmer grows rice and wheat, how will an increase in the price of wheat affect the supply curve of rice? A) The supply curve of rice shifts to left due to increase in the price of wheat as now
more producers start growing wheat due to increase in its price. The supply of rice will fall.

Q) How will an increase in the number of firms shift the market supply curve? A) It shifts the market supply curve to the right because supply will increase at various
price.

Q) If two supply curves intersect, which one does have higher price elasticity (A) Please define elastic supply. A) The flatter supply curve will have higher price

elasticity. When the price has gone up from OP to OP1, the quantity supplied of flatter curve has gone up from OQ to OQ2 which is more than quantity supplied of steeper SS curve.

Q) What causes an increase in supply or rightward shift of the supply curve? When does a firm sell more at the same price? A) (i) Fall in marginal cost due to technological advancement.
(ii) (iii) (iv) Fall in input prices leading to fall in MC. Fall in excise tax rate leading to fall in MC. Fall in the prices of related goods in production.

Q) What causes decrease in supply or leftward shift of the supply curve? When does a firm sell less at the same price? A) (i) Increase in marginal cost due to backward technology.
(ii) (iii) (iv) Increase in input prices leading to increase in MC. Increase in excise rates leading to increase in MC. Increase in prices of substitute goods in production.

Q) Because of Cyclone in coastal area, the sea level, covers a lot of rice fields. This reduces the productivity of land. How will it effect the supply curve of rice of that region? A) It will shift the supply curve to the left as there is decline in agricultural (rice)
productivity.

Q) Due to improvement of technology, the marginal costs of production of television have gone down. How will it affect the supply curve of television? A) Since the MC curve in a competitive firm, essentially the supply curve. Due to
technological progress supply curve shits to right (increase in output).

Q) Consider the following individual and market supply schedule : Price Firm-A Firm-B Firm-C Market (Rs./ (Kg. (Kg. (Kg. SS Kg.) ) ) ) (Kg.) 1 20 45 100 2 37 30 50 3 40 55 135

4 44 50 154 5 48 60 65 (a) Complete the above table (b) Plot the supply of each firm and the market supply curve in a single diagram. What relationship do you observe between the individual supply curves and the market supply curve? (c) Calculate price elasticity of SS of Firm A when price rises from Rs. 2 to Rs. 3. A)
(b) (c) Both have same relationship with price but individual supply curves are steeper and market supply curve is flatter. ES = 0.16

Q) A new technology of production reduces the marginal cost of production of stainless steel. How will this effect supply curve of stainless steel utensils? A) The supply will increase and the SS curve shifts right. Q) Distinguish between extension / expansion and increase in supply OR Distinguish between increase in quantity supplied and increase in supply.
Extension / Expansion in SS / Increase in Supply Increase in Quantity supplied Rightward Shift in Supply 1. With the increase in price if the supply 1. If the supply increases due to changes increases it is extension / expansion or in factors other than price, it is called increase in quantity supplied. The increase in supply. These can be fall in increase in supply is not due to other price of raw materials, improved factors effecting supply. technology, reduction in excise duties etc. 2. Here the quantity supplied increases 2. Here at the same price more quantity is with the rise in price. supplied or at a lesser price same quantity is supplied. 3. There is an upward movement along the 3. There is a rightward shift in the supply same supply curve. curve. 4. Price Qty. SS 4. Price Qty. SS Rs. 10 20 Rs. 10 20 Rs. 20 30 Rs. 10 30 5. Here the quantity supplied changes. 5. Here the supply changes. 6. 6.

Q) Differentiate between contraction in supply and decrease in supply or decrease in quantity supplied and decrease in supply.
Contraction in SS / Decrease in Decrease in Supply Quantity supplied Leftward shift in Supply Curve 1. With the fall in price, if quantity 1. Decrease in supply is not due to fall in supplied falls, it is contraction in price but due to other factors affecting supply. supply like increase in prices of raw materials or increase in excise duties. 2. Here the quantity supplied falls with 2. Here at the same price less quantity is the fall in price. supplied or at a higher price same quantity is supplied. 3. There is downward movement along 3. There is a leftward shift in supply the same supply curve. curve. 4. Price Qty. SS 4. Price Qty. SS Rs. 10 20 Rs. 10 20 Rs. 5 10 Rs. 10 10

Q) Distinguish between movement along the supply curve and shift in supply curve OR Distinguish between change in quantity supplied and change in supply.
Change in Qty. supplied / Movement Change in Supply / Shift in Supply along SS curve 1. This is only due to change in price and 1. This is not due to change in price but not due to any other factor affecting due to changes in other factors affecting supply. supply like changes in prices of factors

of production, excise duties, technology, etc. 2. Here the quantity supplied changes. 2. Here the supply changes. 3. Upward movement takes place when 3. Rightward shift in SS curve takes place SS increases with the rise in price and when SS increases at the same price. SS vice-versa. curve shifts leftwards when SS falls at the same price. 4. 4.

Q) what is the basis of Law of Supply or the Supply Curve? OR Prove that the rising portion of the MC curve is the supply curve. A) The main aim of the producer is to maximize his profits. Hence, he will supply more
quantity at higher prices. The conditions for the producers equilibrium (Profit maximum) are : (i) MC = MR (ii) MC curve should cut MR from below on its rising portion (iii) After the equilibrium point MC > MR. On the OX-axis output/supply and on the OY-axis price and MC are shown. At OP price, the firm will be at equilibrium at point E by producing OQ level of output, at OP1 price, the firm will be at equilibrium at point E1 by producing OQ1 level of output, at OP2 price, the equilibrium output will be OQ2 and OQ3 output is supplied at a higher price of OP3. Hence all the price-output combinations are simply the points on the rising part of MC curve. We can think of the output as the amount supplied to the market. Hence it follows that the rising portion of the MC curve is the supply curve itself.

Q.) Make a Market Supply Curve. A.) Here we assumed that there are only
two firms in the market i.e. Firm A and Firm B. Market Supply Curve is obtained by horizontal summation of supply curves of Firm A & Firm B.

Q) What causes an upward movement along a supply curve? A) A rise in the price of the same commodity. Q) Give the causes for an increase in the supply of a commodity. A) (i) Technological Progress : If there are improvements in the technology,
marginal cost of the firm will decrease. As a result supply will increase. The supply/MC curve will shift to the right. (ii) Fall in input prices : A fall in the prices of factors of production, MC of the firm will decrease. As a result supply will increase. SS curve shifts to right. (iii) Fall in Excise Rates : As a result of fall in excise rates, MC will fall and supply rises.