Supply

Quantity that a seller is willing and

able to sell at different prices.
Supply is relative to a person, place
and time
Supply and stock are different.
Supply is quantity actually offered
for sale at a certain price.
Stock means total quantity , which
can be offered for sales, if
conditions are favorable.
Supply schedule
Statement of quantity offered for
sales at various prices.
Price per unit

Qty.

Rs. 3 per coconut

200
4
500
5
1200

6
Supply curve

2000

Law of supply
quantity of any goods, which
people are ready to offer for sales
generally varies directly with price
As price rises, quantity offered
increases and as it falls, quantity
offered decreases.
Exceptions to the law
1.In auctions, goods are sold
away, what ever be the bid.
2.when further fall in price is
expected.
Extension of supply and increase
in supply
Contraction and decrease in
supply.
When quantity offered for sales
increases or decreases due to rise
or fall in price, the terms

extension and contraction are

used.
Changes in quantity offered for
sale is caused not by a change in
price, but by changes in the
conditions of supply, it is increase
or decrease in supply.
Elasticity of supply
Sensitiveness or responsiveness
of the supply to change in price.
Elastic supply
Supply adjusted very
easily with change in price.
Inelastic supply
Whatever be the change
in price, supply cannot be
adjusted. E.g. perishables, large
fixed capital required for
production, long time required to

produce a commodity e.g.

agricultural goods.
Measurement of elasticity of
supply
Es - % Increase in amount
supplied
_______________________
%change in price
A vertical straight line will
represent absolutely inelastic
supply.
A horizontal straight line will
represent infinitely elastic supply.
Causes of changes in supply
Natural conditions
Technical progress
Changes in factor prices
Transport improvements
Monopolies
Fiscal policies

Markets
Generally a place , where buyers
and sellers meet and strike
bargain.
Market implies the whole area
over which buyers and sellers are
in such touch with each other,
directly or through middleman, that
the price of the commodity in one
part influences it in the other parts
of it.
Market forms:
Degree of competition determines
the form of markets.
Perfect competition
Imperfect competition
Monopoly

Monopolistic competition
Duopoly
Oligopoly
Perfect competition
Existence of same price for the
same commodity at the same time.
Conditions:
Large number of buyers and sellers
Homogeneous product
Freedom of entry and exit
Perfect knowledge
Absence of transport cost
Perfect mobility of factors
Normal profit exist.
Imperfect competition
Existence of different prices for the
same commodity at the same time
Monopoly
Single producer or seller
No close substitute

Monopolist can fix the price and full

control over price
No distinction between firm and
industry
No freedom for others to enter the
industry
Super normal profit.
Monopolistic competition
Large number of buyers and sellers
Product differentiation
Substitute products are available
Some control over price
Supernormal profit may exist
Freedom for other firms to enter
the industry
Duopoly and oligopoly
Duopoly - two sellers, products
are homogeneous or differentiated.

Oligopoly few sellers. Products

are homogeneous or differentiated.
E.g .distribution of petrol in India.
Determination of price in
different markets
Equilibrium of firm and
industry
Firm and industry are in equilibrium
when, either the profit is the
maximum or loss is the minimum.
Firm and industry attain
equilibrium, when marginal cost is
equal to marginal revenue
Marginal revenue (MR) is addition
to total revenue(TR) by the sale of
one more unit, or revenue from the
sale of last unit.
Average Revenue(AR) is the
revenue per unit of a commodity .
It is found by dividing Total
Revenue by number of units sold.
AR =
TR

---------------------Number of units

sold
AR also means price of a
commodity.

Total Revenue (TR) is revenue from

all the units sold. AR or price is
multiplied number of units sold will
give Total Revenue.
AR X number of units sold = TR
Rs. 10 x 20 units
= Rs 200
Relation between AR and MR in
perfect competition
In perfect competition. Average
Revenue will always be equal to
Marginal revenue, as additional
units can be sold at the same price.

Relation between AR and MR in

imperfect competition
In imperfect competition, an
additional unit can be sold at a
lower price only.

No.of units Price(AR)

22
20
18
16

TR

MR

22

22

21

42

20

60

19

76

18

90

14

Equilibrium of the firm.

Firm is in equilibrium, when it has

no incentive either to expand or
contract its output
It has maximum profit or minimum
loss.
This will happen when MC =.MR
Importance of time element in
equilibrium
Determination of value is question
of demand and supply
Price comes to settle at a level,
where marginal utility to the
purchaser coincides with marginal
cost of production of the producer.
On the basis of time, four broad
types of equilibrium price
Market price
Short period or sub-normal price
Long period or normal price
Secular price or price in a
generation

Time element determines the time

allowed for the forces of demand
and supply to adjust themselves.
Market period may be some hours
or day and supply means stock or
fixed. Price is determined by the
forces of demand only.
Short period may be few days
allowed for the supply to adjust to
demand. Supply adjusted by
changing the variable cost of
production.
Long period means a year or two
and supply can be fully adjusted to
demand. Fixed cost can also be
altered.
Normal price is influenced by MC.
Secular price means very long
period and all changes caused by
growth of knowledge, population
etc. can be accommodated.

Equilibrium of a firm under perfect

competition in the short run.
For a firm in short period, price is
given.
Price is determined in the industry
by the intersection of industry
demand and supply. The firm can
sell as much as it likes at the
prevailing price.
Demand or AR curve facing the
firm is perfectly elastic. So MR =
AR