In a free enterprise economy, prices are determined by the interaction of forces of demand and supply. We have already explained the forces of demand in Chapter 2. The object of this chapter is to analyse the supply factor. In particular, we will explain the relationship between the price and the quantity supplied of a commodity in terms of the law of supply. 5.1 CONCEPT OF FA Supply of a commodity refers to the quantities of a commodity which producers or sellers are willing to produce and offer for sale at various prices during a particular period of time. There are three important aspects of supply which need to be noted in this definition of supply. 1. Supply is a desired quantity, ie, how much producers are willing to sell and not how much they actually sell. 2. The second thing to note about supply is that supply is always expressed with reference to some price, Just as demand for a commodity is always expressed at a price, similarly supply of a commodity is always expressed at a price. With a change in the price of a commodity, its supply will also change. 3. Like demand, supply is a flow variable, Therefore, supply refers to the amount which producers or sellers are willing to sell during a specific period of time-per day, per week, per month or per year, Thus, the statement that 200 cars will be supplied is an incomplete statement. The statement will make sense only if we mention the price at which these cars will be supplied PPL AND PRICE ELASTICITY OF SUPPLY _ LAW OF SUPPLY and the specific time period during which these cars will be supplied. Therefore, the complet, and meaning statement would be that at a prig of @10 lakhs, 200 cars will be supplied per day by the car dealer. 5.1.1 Individual and Market Supply | We can distinguish between individual supply and market supply. Quantity of a commodity which one producer is willing to produce and offer for sale is known as individual suppiy A single producing unit or a producer is called ‘firm’ in economics. Therefore, individual supply refers to the quantity of a commodity which a firm is willing to produce and offer for sale at Particular price during a specified period. All the firms producing a commodity constitute an indus} by i iia the commodi i Y a ity avai potenti supply’ aoa any Siven time, Iti raat lable wit tte ono commodity doce nat the go om™Modity but only that pa lucers are to brisé offer for sale at a particil®they Ply Prig day ppl city and price. Thus, the stock of a com: amount of it with the produ, is that part of the stock whi, in the market. It is the quantity which is actually brought int sale. For instance, traders in fo have a large stock of foodgraine ens have built by purchasing foodgrains from the farmers immediately after the harvest seas ce The stock of foodgrains with them is the tori amount of foodgrains with them. The suppl of foodgrains is that part of the oceae stock which they are prepared to bring into the market at a particular price. Thus, stock is the total amount available with the producers; it is the intended supply or potential supply. On the other hand, supply refers¥o thé amount which is actually brought into the market for sale, i. actual supply. Remember, the concept of stock has not any time dimension, it is expressed at a point of time like stock of foodgrains on Ist March, 2020. On the other hand, the concept of supply has a time dimensions; it is over a period of time like the supply of foodgrains per month. ea ELE aa How much quantity of a commodity an individual firm or all the firms are willing to produce and offer for sale during a specified period is affected by a variety of factors. We explain below the main determinants of supply of a commodity: 1. Price of the Commodity: The most important determinant of the supply of nodity is its own price. Given other larger quantity of a commodity ‘supplied at a higher price and quantity will be supplied at ower price. This is so because the the price, given the per unit cost juction, the higher is the per unit » higher profit would motivate firms to supply more in order her profits. Moreover, new nmodity is the total “ers, while su; Pply is offered for sale ty of a commodit to the market for 2. Goals of the Produces: The goals or objectives of the firms also determine the supply of a commodity. The goals of the firms may be ‘profit maximisation’, ‘sales maximisation’ or ‘risk minimisation’. Ordinarily, most of the firms try to earn maximum profits. That is why it is assumed in economic theory that the objective of the firm is to earn maximum profits. The higher is the profit from the sale of a commodity, the higher will be the amount supplied by the firms, and vice versa. Firms could, however, pursue other objectives sometimes. At times, the firms may aim to maximise the sales or revenue rather than profits They may like to maximise the sales in order to acquire status and prestige in the business world or to dominate the market. If the firms aim at maximising the sales, they may produce and sell more than the profit-maximising output. Similarly, if the firms aim at minimising the risk, they will avert risk and produce and supply a smaller quantity of the commodity. 3. Input Prices: Another factor influencing the supply of a commodity is the Prices of inputs or factors used in its production such as raw materials, labour, machines, etc. Input prices determine the cost of production. If the producers have to pay higher prices to secure the factors of production needed for producing the ‘commodity, its cost of production will be higher. Given the price of the commodity, a higher cost of production reduces the profit margin. This will lead to a lower amount of output that firms will produce and offer for sale at a given price level. A fall in the input prices and, therefore, a fall in the cost of production will have the opposite effect on supply. In general, supply will change in the opposite direction of change in input prices. 4, Prices of Related Commodities: Supply of a commodity also depends upon thePrices of the related goods, particularly the substitute goods. Producers have always the possibility of shifting from the production of one commodity to the production of another commodity. If Prices of other commodities are rising, while the price of the commodity being already produced remains constant, Producers will find it more profitable to produce and sell other commodities. As a consequence, the supply of the commodity. under study will fall. For instance, a farmer can grow various vegetables on a given piece of land. If the market price of peas rises, farmers will produce and supply more peas in place of cabbage and other vegetables by diverting resources from the production of other vegetables to the production of peas. In general, the supply of a commodity varies inversely to a change in the price of a substitute good in production. 5. Techniques of Production: Techniques of production also exert a significant influence on the supply of a commodity. An improvement in the technique of production, the invention of new machines and advanced techniques reduce the cost of production and increase the profit margin thereby. Increased profitability induces the producers to produce more and increase supply thereby. 6. Structure of the Industry: The supply of a commodity also depends on whether the industry is monopolised or competitive. In case of monopoly, one firm produces the entire commodity. A monopolist firm will like to restrict the output so as to raise the market price. But if there is competition among firms, there will be no tendency to restrict the output. Thus, the competitive firms are likely to produce and sell more as compared to monopolised industry. 7. Policy of Taxation and Subsidies: The taxation policy of the government also influences the supply of a commodity. ee 10, (ie., taxes iMposeg Indirect t@%XC" GST, excise duty Ven ties a Oe ey to increase the prices etc.) ermodities. ‘The imposition of hea the cot commodity is like an incre,’ es a ‘i ae an of production ke therefon, id + will generally lead to a decrease ;, re it will geveduction of taxation will hy if supply. na effect. It will motivate ihe ORE cae a Subsiig it rocifiect the supply of a commog rp The government pays subst {0 firms ; ool } to encourage them to produce certai, op ‘ods. Subsidies reduce the cost ang f 3M. ihaduce the producers to increase supply 4 wie Expectations about Future Prices, a ict " Producers’ expectations about futi, 65%" market prices affect the supply of ay J 7. polit) good. If the producers expect an increas | 3 Boe in the price of a commodity in fut J 9 yur they will supply less today and hoa agen it s0 as to offer a large quantity of te FT ty commodity in future at higher prices Conversely, expectations of fall in future prices tend to increase supply in the} 42,1 Suppl current period. eae . Natural Factors: Natural factors are eapressed in Particularly important for the supply o Te sup agricultural products, Natural facos Bg)! lke drought flood, unfavourable cma FH conditions, etc, adversely affect tt fy," supply of some commodities. Hea) f "Al f tains, flood and drought condition Sip» will lead to decrease in the supply ¢ wy. Sgricultural commodities, Adequél te eo ae favourable climatic conditio® hey ae P in increasing the supply F Mong ral commodities, uP one sions Producers: Someti FE .%, some apron) £21 a pool and enter Eg, A Yy commen nent t0 restrict the supply ff He create anting 2™ arge profits, They™ fy et EPs a8 a conse Of the comme decrease, sequence, its supplyig fe n 1. Availability of Transport and Communication Facilities: The 5 of a commodity depends upon the types of transport and communication facilities available in an economy. An improvement in the transport and communication facilities will expand the size of the market. This will motivate the producers to produce and supply more. upply Determinants of Supply at a Glance Price of the Commodity Goals of the Produces Input Prices Prices of Related Commodities Techniques of Production Structure of the Industry ". Policy of Taxation and Subsidies . Expectations about Future Prices . Natural Factors |. Agreement among Producers . Transport and Communication Facilities paenauaene Bs 5.2.4 Supply Function The important determinants of supply can be expressed in the form of a ‘supply function’. The supply function is a statement which states the relationship between the quantity supplied of @ commodity and its determinants. The supply function may be written as: 8, =f By Py mm Py Gy, E, ~ Fy TE Gy N/M, -) where S, is the quantity supplied of a commodity ‘n’; f is a symbol showing the relationship between supply of a commodity ‘n’ and all its determinants; P,, is the price of commodity ‘n’; P, ... P, are the prices of commodities other than ‘1’; G, is the goal of the firms; F, ... F,, is the expression for prices of different factors of production; T is the technique of production; E is a symbol for expectation about future prices; G, is the taxation policy of the government; N is the expression for the natural factors; and M, stands for means of transportation. ‘SUPPLY — LAW OF SUPPLY AND PRICE ELASTICITY OF SUI ae Pel aaa For formulating a simple theory of price, we need to know the relationship between price and supply of a commodity, ie, what various quantities will be supplied at various alternative prices. The ‘law of supply’, or more appropriately ‘supply hypothesis’ gives us the relationship between price and supply of the commodity. The Iaw of supply states that, other things remaining the same, the quantity of any commodity that firms will produce and offer for sale rises with @ rise in its price and falls with a fall in its price. In other words, the law of supply states that higher the price, the larger is the quantity supplied; and lower the price, the smaller is the quantity supplied. Therefore, in terms of law of supply, the quantity supplied of a commodity is positively related to its price. Law of supply is based on the assumption of ‘other things remaining the same’ i.e., ceteris paribus order assumption. Other things are the determinants of supply other than the ‘own price of the commodity, and they include input prices, technology of production, prices of related goods, taxation policy, goals of production, etc. Law of supply assumes that these other determinants of supply do not change. Law of supply can be illustrated with the help of a ‘supply schedule’ and a ‘supply curve’. 5.34’ Supply Schedule A supply schedule is a tabular statement showing various quantities which producers are willing to produce and sell at various alternative prices during a given period of time. It states the relationship between the price of a commodity and the quantity that would be supplied. It is drawn on the assumption that there is no change in the factors other than the own price of the commodity influencing supply. Supply schedule is of two types: Individual Supply Schedule, and Market Supply Schedule. |. Individual Supply Schedule: An individual supply schedule is defined as the table which shows various quantities of a PPLY 79commodity that an individual producer or a firm would offer for sale at different prices during a given period, assuming, that factors other than the own price of ood are given. Table 5.1 represents the such a supply schedule. Tt is this table that one particular producer is willing to sell 5 thousand kgs of a good X when the price of this good is 710 per kg. If the price rises to 215 per kg, he may be willing to sell 10 thousand kgs of good X. It is obvious from this individual supply schedule that with an increase in the price r from In the X is 210 per Ki supply every rise in incr the quantity supp! 280 thousand kgs. the law of supply —mor 2 versa. Supply 1 of the law of supply. Ih Table 5.2, we have shown market supp directly plotting the mark information about the price of a commog price and vit presentatio schedule by above table, wh g, the pro 90 thousand kgs price, the ‘eased. For example, en the price of the » ducers are Prepareg per week. But wig quantity supplieq hay at a price of %20 per dof X has increased y, This is exactly in tune wig e is supplied at a hi, schedule is a tabuig of X, its quantity supplied increases. and its quantity supplied at each price by aj Table 5.1: Individual Supply Schedule the firms in the market. However, market supply for Good X schedule can also be obtained by adding all the individual supply schedules. As with the market Price of | Quantity Supplied | Points on ‘market’ supply sch ae Bee Sippiyy | demand schedule, a et’ supply schedule ani e , pp is a summation of all the ‘individual’ supply wie 9?!) a kg) ara me Damier schedules. This is explained in Table 5.3. + pial SU , A “ a 10,000 eI Table 5.3: Market Supply Schedule for sal cure bet a 4 Good X sith shows 23 25,000 D Price i re Duet 35,000 E of ee eng Pres during 2. Market Supply Schedule: Market supply | x (@ ‘mig no schedule of a good is the table which | pop fe opp shows various quantities of the good | jg) iy y bi that all the firms are willing to supply lt at each market price during a specified | _() ite 51 time period, assuming that factors other | 19 | 5, Me an i than the own price of the good are given, | cog toning In Table 5.2, an imaginary market supply | ' | 10,000 | 8,000 ke schedule for commodity ’X’ is shown, 20 | 14,000 | 11,000 Table 5.2: Market Supply Schedule for Good x | 25 | 17,000 | qa, Price of Cae My 19000 + 14000=35! ice kg) ‘Aas ure tag there are only two fir 90 A market. Market oa it Commodity. X in tH 15 180 & aulding the quangeP PLY Schedule is obtained 5 20 280 c at different prices? uPPlied by firms ‘a’ and ® 25 460 D Which is simply treet 2 ives market supP) a 20 | | BY A and ag, (ye 54m of amounts suppl "spectively, a dig ® Col. @) and Col @ “tent prices shown in Col:Bh, buy Ph ky Odi y a PPh I atk edul appl for upp orth oo" For example, at price of 210, the ma is 9000 kg, ie. sum total of 5,000 kg and poe ig supplied by ‘A’ and “B’ respectively, ang on. As is shown in Table 5.3, with every increase in price, the quantity supplied by the two fenn taken together increases. This is exactly in line with law of supply, A supply curve is a diagrammatic presentation of the law of supply. It conveys the same information as a supply schedule does. But it gives this information graphically, and not in the form of numerical figures. The supply curve carries the same explanation and assumptions as a supply schedule. Like supply schedule, supply curve is also of two types: 1, Individual supply curve, 2. Market supply curve. 1, Individual Supply Curve: An individual supply curve is defined as the curve which shows various quantities of a given commodity which an individual producer is willing to supply at different prices during a given period of time, assuming no change in factors other than the own price affecting supply of the commodity. Individual supply schedule of Table 5.1 is plotted graphically to derive an individual supply curve as shown in Fig. 1 below: rket supply Price (@ per ka.) Beat 8, 28 anny, Quantity (1,000 ka) Fig. 1. Individual Supply Curve Five points A, B, C, D, E corresponding to each price-quantity combination shown in SUPPLY — LAW OF SI SUPPLY AND PRICE ELASTICITY OF SUPPLY nniiiiiiiaiiaras Table 5.1 are plotted in Fig. 1, where we show Price on Y-axis and quantity supplied on X-axis. By drawing a smooth curve through these five Points, we get a curve SS, which is known as the supply curve. The supply SS has a positive slope. The positively sloping supply curve SS shows the direct relationship between the price and the quantity supplied of a commodity. 2. Market Supply Curve: Market supply curve is the curve which shows various quantities of a commodity which all the producers are willing to produce and sell at different prices during a given period of time, assuming that factors other than the own price of the good remain constant given. Market supply schedule of Table 5.2 is plotted as market supply curve SS in Fig. 2. ig - Price ( per ka) So Bis Smee isu ee 26) 46 @ x ‘Quantity (10.000 ka) Fig. 2. Market Supply Curve Here, we have drawn market supply curve by directly plotting the market information about the price of a commodity and the quantity supplied at each price. However, market supply curve can also be drawn graphically as the horizontal summation of individual supply curves in the same way as we did in the case of market demand curve in Chapter 2. In Panel (i) of Fig. 3, the supply curve SS, of the firm ‘A’ is drawn and in Panel (ii), the supply curve $S, of the firm ‘B’ is drawn. In Panel (iii), we have drawn market supply curve $5, by aggregating the individual supply curves 8~ Quantity Fim B 0) Quantity Firm A () SS, and SS, of the two firms ‘A’ and ‘B’. We have added the two individual supply curves $8, and SS, horizontally because we show the quantity supplied horizontally. Let us explain it. For example, at price OP,, firm A supplies P,A, while firm B is willing to supply P,A) quantity. Therefore at OP, price, the two firms taken together are willing to supply P,A quantity [P,A, + PA, = P,A in Panel (iii)]. This gives us one point (point A) on the market supply curve. Similarly, we get another point B corresponding to OP, price showing that industry is willing to supply P,B (P,B, + P,B, = P,B). By joining points A and B in Panel (iii), we get market supply curve SS, A market supply curve is usually upward (positive) sloping from left to right, indicating a direct relation between price and supply. A market supply curve is sometimes called as industry's supply curve. It is evident from Table 5.1 and 5.2 as well as from Fig, 1 and 2 that if price is less than 710 per kg, the sellers will not be prepared to sell any unit. The price below which the sellers are not willing to sell their goods is called the reserve price, The supply curves $S in Fig. 1 and Fig. 2 start from point A, indicating that sellers are not willing to supply any quantity if price is less than & 10 per kg. A supply curve, like the demand curve, can be straight line or curve line. The typical supply curve slopes upward from left to right ie, it hay a positive slope. A positively sloping curve depicts the law of suyply. Any particular supply curye is drawn on the basis of ceteris paribus order assumption, ie, other things remaining the same Fig. 3 Derivation of Market SupPh Quantity 7 +B (ii) ly Curve 5.3.4 Explanation of the Law of Suni. ‘The law of supply indicates a positive relation between the price of the commodity and quantity supplied. It is indicated by a posit sloping supply curve. Positive slope of a supj curve can be explained in terms of the foo three factors: the price of the commodity, the largeristy profit that can be earned, ceteris puri This gives incentives to produces i produce and offer for sale a larger amt of the commodity. Thus, the price oft to produce and supply more in the mat other things remaining the same. ~ The positive slope of the supply un also caused by the rise in the mae cost of production. As explained i* later chapter, marginal cost of produ increases with increase in output be™ of the law of diminishing returns. 0 of the cases, marginal cost of produ creases with increase in the amoutt Production This implies that the pm a ral be Prepared to produce ani a Ser quantity of a commodity cote Price so as to cover the of production,Ne 3. A tise in price would give incentive not only to the existing producers to produce L a larger quantity of a commodity, but it would also motivate the other prospective producers to produce this commodity so as to earn higher profits. For example, a tise in the price of rice would motivate the | farmers to produce more of rice in place of other products like wheat. The farmers would withdraw resources from the production of wheat and other products and devote the same to the production of Price Sy rice. Thus, at higher prices, more firms are willing to enter the market to produce the ° ES es ie med ores eo r qi Quantity Sood. This leads to increase in the quantity Fig. 4 Supply Curves and Time Period supplied of a commodity. 53.5 TRRSPerbe and Suna ahora supply curve is upward sloping 82. ‘8 Economists distinguish between different types of 5, Long-Run: Long-run is the period during supply curves based on the way supply responds which the firms can build new plants or |, to a change in price over time, We may divide close down the old plants. Moreover, ry, time into the following three periods on the basis the new firms can enter the industry by sy Of SUPPly response to a change in price: setting up new plants. Therefore, it is dt i a 1. Market Period: Market period is very short period in which the supply is fixed. The maximum supply in the market period is the stock of the good which has already been produced. This is the case with the supply of perishable goods. For instance, once the vegetables have been grown and brought to the vegetable market, there cannot be any change in the supply of vegetables, no matter what the Price is. Thus, in the market period firms cannot adjust their output to any change in price. As a result, the supply curve of a firm or industry is vertical as illustrated by §,S, in Fig. 4. 2. Short-Run: Short-run is the period in which supply can be adjusted to some extent. Producers can increase production by running the existing plant for longer hours like two shifts instead of one shift, Short-run is not long enough for the firms to set up new plants or new machines. The short-run supply can be increased to a limited extent. Therefore, possible to bring about a large change in quantity supplied in the long run. This is illustrated in Fig. 4 by a flatter supply curve S,S,. ‘5.316 Exceptional Supply Curves— “© Exceptions to the Law of Supply Normally the supply curve slopes upward to the right as indicated in Fig. 1 and 2. But in certain exceptional cases, the supply curve may take a different shape. It is important to note two exceptional shapes of the supply curve. 1, Vertical Supply Curve: There are certain commodities the supply of which cannot be increased or decreased at all. Thus, in case of the rare goods such as classical paintings, old manuscripts, rare postage stamps, old coins, the supply of which is fixed. In some other cases, the supply may be fixed in the short run, and it can be increased in the long run only. For example, in case of wheat and other agricultural products, the supply is fixed once the crop is grown, and the supply ‘SUPPLY — LAW OF SUPPLY AND PRICE ELASTICITY OF SUPPLY 83y 8 s — P, =I nee x ° Quant Fig. 5 Fixed Supply of it can be increased only in the long run. In such cases, the supply curve will be a vertical line parallel to OY, as illustrated by SS curve in Fig. 5. A vertical supply curve indicates that the amount supplied of a product remains same (OQ) irrespective of whether price is lower (OP,) or higher (OP,). 2. Backward Sloping Supply Curve—In certain cases a part of the supply curve may have a backward slope. This would mean that a smaller quantity would be offered at a higher price than at a lower price. In Fig. 6, when the price is OP, the supply of the product is OQ but when the price rises to OP,, the supply falls to 0Q,. As a result, the supply curve has a negative slope beyond point T. This type of backward sloping supply curve may occur in the case of labour supply (supply being expressed in terms of number of houry worked). As wage rate (price of labour) increases, the worker works for more hours initially so as to earn more income, He prefers labour to leisure, At a very high wage rate, the worker may bg willing to work for fewer hours 0 as to enjoy more leisure. At a very high wage rate, the worker Prefers leisure to work as he may have eame enough income. s Pr g 1 J Ep 3 # én oO GO, (Soba Quantity (Labour hours) Fig. 6 Backward Sioping Supply Curve EVM N/a sata eon ca Sy Coll san Fi aaa A Ao ‘As with demand, it is important to dist between a movement along the supply curve ay shift of the whole supply curve, i.e,, between ig ‘change in quantity supplied! and ‘change in sup ipply When quantity supplied changes as a result of change in the own price of the commodity other factors remaining the same, it is known change in quantity supplied. When the quanti supplied of a commodity rises due to a rise the own price of this commodity, other fa affecting supply remaining the same, it is call “xpansion (extension) of supply’ ox increas Guantity supplied. On the other hand, # the quantity supplied of a commodity falls 10 fall in its own Price, other factors rem the same, it is called ‘contraction of supply fall in quantity supplied), Thus, ° supply curv “MPply’. This is ‘illustra, 8 - Az {* Expansion ots Py A: upp 8 Contraction & p,| a of supply s Di gkOigs. OL ber ‘Quantity Fig. 7 Expansion and Contraction of Supply Look at Fig, 7, at OP, price, the quantity supplied is OQ,. Now if the price rises to OP,, the quantity supplied rises to OQ,. This movement from A, to ‘A, in the upward direction (as indicated by the direction of the arrow) on the given supply curve SS represents ‘expansion of supply’ or ‘increase in the quantity supplied’. On the other hand, if the price of the commodity falls to OP, the quantity supplied of the commodity falls to OQ, This movement from A, to A, in the downward direction (as indicated by the direction of the arrow) on the given supply curve is the ‘contraction of supply’ or ‘fall in the quantity supplied.’ The amount supplied of a commodity may change not because of any change in the own price of the commodity but due to change in other factors affecting supply like change in input prices, change in prices of related commodities, change in technology, etc. When the amount supplied of a commodity increases or decreases because of change in factors other than the own price of the commodity, it is called change in supply. A change in supply implies that a larger ‘or smaller quantity will be supplied at the same price because of change in other factors affecting supply. ‘SUPPLY — LAW OF SUPPLY AND PRICE ELASTICITY OF SUPPLY An increase in supply refers to a situation when the producers are willing to supply a larger quantity of the commodity at the same price or same quantity at a lower price. An increase in supply may result from improvement in technology, decrease in input prices, fall in the prices of related commodities, etc. A decrease in supply, on the other hand, refers to a situation when the producers are willing to supply a smaller quantity of the commodity at the same price or same quantity at a higher price. A decrease in supply may result from increase in input costs, rise in prices of related products, change in motivation of the producers, etc. Change in supply is indicated by shift in the entire supply curve. An increase in supply means the entire supply curve shifts to the right, indicating a larger amount offered at every price. Likewise, a decrease in supply means that the entire supply curve shifts to the left, indicating a smaller quantity offered for sale at any particular price. This is illustrated in Fig. 8. y + Decrease insupply So Fig. 8 Shift in Supply A rightward shift in supply curve from S,S, to S,S, indicates an increase in supply. At a given price OP, the producers shift from point A, on §,S, to point A, on S,S, (as shown by the direction of the arrow) because of increase in supply. The producers offer a larger quantity OQ, instead of OQ, at a given price OP. Increase in supply may also mean that the same quantitycause Chal nge in Supply ‘Decrease itt Suey Factors whic! shift af Tcrease in Supply (Rightwoard — of me) of supply cure) Th.0 of less efficient technig, | 1. Technology | 1. Improvement in techniques © of production. ‘ | production. 2. Rise in input a | 2 Input Prices 2. Fall in input prices. = 3. Rise in the prices of othe, 3. Prices of other 3. Fall in the prices of other goods. goods goods, 4, Raising taxes on production | 4. Taxes and subsidies | 4. Lowering of taxes on or lowering production production or raising, subsidies. | Eta 5, Expected rise in prices of | 5: Producers’ price | 5. Expected fallin prices 0 goods in future, | expectations Cees 6. The number of sellers 6. Number of sellers_| 6. The number of sellers ae ni ie r increases, OQ, is supplied at a lower price OP,. This is e Ss indicated by shift from A, on S,S, to B, on $,S,. S; This is increase in supply. On the other hand, a decrease in supply is indicated by leftward 8p a ‘a Ierease in supply shift in the supply curve from §,S, to $,8,. The & amount supplied at OP price decreases from i ©Q, to OQ, as a result of shift from point A, on - supply curve $,S, to point A, on supply curve z $,8;- Decrease in supply may also mean that the QQ, Quantity same quantity OQ, is supplied at a higher price Fig. 10 Increase in Supply OP, This is indicated by shift from point A, on 5,8, to B, on §,S, in Fig. 8. This is decrease in va supply. ‘ Expansion of supply s Factors leading to change in supply, ie, shift P, 5. in supply curve, are summarised in the Table 5.4, i 5 eee 0 5.4.3 Expansion of Supply and = Increase in Supply The difference between expansion of supply and @ increase in supply can be shown diagrammatically, % Q, Quantity Expansion of supply refers to a situation when e Fig. 9 Expansion of Supply more quantity of a commodity is supplied at a the other hand, an i - higher price. This is shown in Fig, 9, to a situation an increase in supply It would be seen in Fig. 9 that as the price of the commodity rises from OP, to OP, the quantity supplied of this commodity rises’ from 0, to ©,, In this situation, there will be upward movement from A to B along the given supply curve SS. Same price becau. the own. quantity of a commodity at Se of change in factors othet the cor 3 ity ee an Fig, 10 that at oy 'S Supplied initially. But asa other than the ownthe commodity, OQ, quanti supplied at the same price OP Thie in Fig. 10 by movement from point aoaed curve $8 to point B on supply curve so” This rightward shift of supply curve tog, ot 5,8; shows increase in supply. ia ity of the commodity is Distin in between Expansion of Si Uppl and Increase in Supply Lg Increase in Supply | Itrefers toa —_| larger amount being supplied at the same price. Expansion of Supply 1. It refers to a larger quantity being supplied at a higher price of the | commodity. (2, Itis due to arise | 2, It results from | im the own price of | changes in ___ the commodity. factors other | than the own | price of the commodity. 3. It involves an 3. It leads toa upward movement along the same supply curve. rightward shift of the supply curve. 544 C8htradtion of Supply "and Decrease in Supply The difference between contraction of supply and decrease in supply can also be illustrated with the help of a diagram. Contraction of supply refers to a situation when a smaller quantity of a commodity is supplied at a lower price. This is shown in Fig. 11 below: % Contraction of Supply apm! 0, Quantity Fig. 11 Contraction of Supply ‘SUPPLY = LAW OF SUPPLY AND PRI s Decroase in supply ° a, Quantity Fig. 12 Decrease in Supply It would be seen in Fig. 11 that as the price of the commodity falls from OP, to OP,, the quantity supplied of this commodity falls from OQ, to OQ,. In this situation, there will be downward movement from A to B along the given supply curve SS as shown in Fig. 11. A decrease in supply, on the other hand, refers to a situation when the producer is willing to supply a smaller quantity of a commodity at the same price because of change in factors other than the own price of the commodity. In this situation, there will be leftward shift in the supply curve. This is explained in Fig. 12. It would be seen in Fig. 12 that at OP price 0Q, quantity of the commodity is supplied initially. But as a result of change in factors other than the own price of the commodity, OQ, quantity of the commodity is supplied at the same price OP. This is illustrated by a movement from point A on the supply curve SS to point B on the supply curve $,S,. This leftward shift of supply curve from SS to supply curve $,S, shows decrease in supply. Ei SSW aaes nse Law of supply tells us the direction in which supply of a commodity will change as a result of change in its price, but it does not give us the magnitude of change in supply. Price elasticity of supply gives us this information about the tICE ELASTICITY OF SUPPLY 87Distinction between Contraction of SuPPIY and Decrease in Supply Contraction of Supply] (1 Temeans a fall in the 1. It means a smaller amount supplied at} amount bel | lower price of the | supplied at th | commodity. same price. |2 It is due to fall in| 2.1 results from | the own price of the | changes in factors | commodity. other than the | E own price of the | commodity. 3. It leads to a leftward shift of the supply curve. | 3. It involves a | downward | movement along the L_same supply cu jnagnitude of change in supply of a commodity or caponse to a change in its price. Elasticity of supply is as important as the elasticity of demand, and it has the same meaning. 5.5.1 Meaning Of Elasticity of Supply Price elasticity of supply measures the degree of responsiveness of the quantity supplied of a it change in its price. It measure of the quantity supplied of 4 commodity to a change in its price. More Precisely, Price elasticity of supply is defined as the proportionate change in the quantity supplied of a commodity divided by a given Proportionate change in its price, It may be expressed as: where, e, stands for elasti Notice that the concept city of supply of supply elast shows a relationship betwere relatives ite, the ratio between percentage changes, and tives, not between absolute numbers, This Means that like the demand elasticity, supply elasticity ie independent of the unit of measurement like rupee or kilograms. Moreover, the price elasticity of supply will always be a Positive number ; quannity 5 rice anctne PP ane th ae positively related, Ply bed agai a a comm ibe the various degrees Of price To descril ts have grouped ita. of supply, economist five categories: 1. Perfectly elastic, 3. Unitary elastic, lastic. ‘a ei these categories below: 1. Perfectly Elastic Supply: Infigy, perfectly elastic supply repres, case in which the quantity supp), a commodity responds by an j amount to a very small change in » It refers to a situation when any ay will be supplied at the going nothing will be supplied at a |p price. In Fig. 13, Panel (i) we have an infinitely elastic supply cur which runs parallel to X-axis, ie, @ horizontal straight line. It has inf elasticity at price OP, showing that sel are Prepared to sell an infinitely antity of a commodity at the pre and nothing would be supplied atl a slightly lower Price. Elasticity of su is infinite (co), This is an ext 2 Perfectly. 4. Elastic, id shows that the aut Ff a co; ‘ i Matte, mMmodity remains 0, sha the Price a this elastics Ssticity og Supply is zero, ExYa Ys S, 8 Pt Bee ea « 3, 2 P : digg au aiciar — (i) Perfectly elastic supply (i) Perfectly inelastic supply e,=0 o £54 s, 8 i Quantity by (ii Unitary elastic supply Fig. 13. Categories of Elasticity of Supply perfectly inelastic supply are old paintings, stamps, coins, etc. For example, there is only one Mona Lisa painting. A higher price cannot bring even one more Mona Lisa painting. 3. Unitary Elastic Supply: Unitary elasticity of supply refers to a situation when the percentage change in the quantity supplied of a commodity is exactly equal to the percentage change in its price, The numerical value of elasticity of supply will be 1 in this case. Fig. 13 (iii) illustrates supply curve with unitary elasticity. Any straight line supply curve drawn through the origin has an elasticity of unity over its entire length, no | matter what its slope is. Thus, the supply curves S, and S, have a unitary elasticity _ at all the points. (iv) Elastic and inelastic supply 4. Elastic Supply: Supply is said to be elastic when the percentage change in the quantity supplied of a commodity is greater than the percentage change in its price. In this case, the quantity supplied is relatively more responsive to change in price. The numerical value of the price elasticity will be greater than 1, Fig. 13 (i) shows an elastic supply curve S,. Anywhere on this supply curve S, the elasticity is greater than unity, though the particular numerical value of elasticity will vary along the curve, In fact, any straight line supply curve that cuts the Y-axis has elastic supply all through. 5. Inelastic Supply: Supply is said to be inelastic when the percentage change in the quantity supplied of a commodity is less than the percentage change in its price. In this case, the quantity supplied is relatively eeless responsive to change in price. Supply elasticity in this case is ess than 1. Fig. 13 () shows an inelastic supply curve S,, Anywhere on this supply curve, the elasticity is less than unitary, Elasticity is not constant along the supply curve, but it is always less than 1. Any strnight line supply curse that cuts the X-axis has inelastic supply all through 5.5.3 Measurement of Elasticity of Supply We can measure the elasticity of supply by two methods, namely. 1, Percentage Method, 2. Geometric or Point Method. These two methods of measuring elasticity of supply are explained below: 1, Percentage Method: The percentage method of measuring the price elasticity of supply is based on the definition of elasticity, i, the ratio of percentage change in quantity supplied of a commodity to a given percentage change in its price. Thus, the formula for measuring price elasticity of supply is: _ Percentage Change in Quantity Supplied a Percentage Change in Price In terms of symbols, we can write: 42 100 xO naan «100 p x10 4Q, P AQ P = QAP EPG Thus, the formula for measuring price elasticity of supply is: where, ¢, stands for elasticity of supply, Q stands for initial quantity, 4Q stands for change in quantity supplied, P stands for initial price, AP stands for change in price, ig formula to calculate price ine en a) ¢ jem 1: If an increase in the price gp, oe pen from 240 to €50 results in an in potjuantty supplied of pens from 1,00 iuhat is the elasticity of supply? S O15 Solution: Here Q = 1000, AQ = 1,500 ~ 1099 . P =40, AP=50-40=49 4Q,.P on ap “O) Wa ap Q 0 - 500 40s , ~ 70) * tong pio Problem 2: The price of a commodity is 2p, 4 unit and its quantity supplied at this pre 500 units. If its price falls by 10% and quan 12 supplied falls to 400 units, calculate its yu) 7 elasticity of supply. . Solution: % change in quantity supplied = F109 = 0, i ] : i 0 20 per e, = BChange in quantity supplied _20_, [amiss the % Change in price 10 Pc las Problem 3: A producer supplies 200 unit dl "Spi B00d at 210 per unit. Price elasticity of su Pera is 2. How many units will the producer Sif at T11 per unit, ee Solution: ‘ iz AQeaR 8. AP AQ = 400 x 1.25 = 500 The producer will supply = Q + AQ = 400 + 500 = 900 units Problem 6: With a fall in the price of a commodity from %10 per unit to 88 per unit, the quantity supplied of the commodity falls by 500 units. ‘The price elasticity of supply is 2. Calculate the quantity supplied of this commodity at the price of 88 per unit, Solution: Here P = 10, P, = 8, AP = 10 - 8=2 AQ = 500, €, = 2. AQP Here SG Wa Yo" yti 10 500 v .d at the price of €8 per unit 0 ~ 500 = 750 units nits of a commodity are » of &5 per unit. At what price “0 i ‘will be supplied? ipply is 1. Ip PRICE ELASTICITY OF SUPPLY Solution: Here, P = 5, Q = 500, Q, = 600 AQ = 600 ~ 500 = 100 units, ¢, = 1 ee New price = P + AP=5+1=6 :.600 units of the commodity will be supplied at %6 per unit. Problem 8: Given e, = 3, P = 40, P, = 42, AQ = 150. How many units of the commodity will be supplied at P, price. Solution: AQP CR 150_ 40 2 3=p-40*Q = Q- at = 1000 s-Quantity supplied at the price of €42 per unit = Q + AQ = 1000 + 150 = 1150 units 2. Geometric or Point Method: Geometric method is used to measure the elasticity of supply at a given point on the supply curve. That is why it is also known as the point method of measuring elasticity of supply. This method is explained below in Fig. 14. Suppose we want to measure price elasticity of supply at point K on the supply curve SS in Panel (i). Point K indicates that at OP price the quantity supplied is OB. Extend supply curve SS downward so that it meets X-axis at A. The elasticity of supply at point K ‘on the supply curve SS is measured by the AB formula G5 Le. the ratio of horizontal segment AB divided by the quantity supplied OB at point K. The horizontal segment is the distance between the point of intersection of supply curve ‘on X-axis (point A in Fig. 14 and Fig, 15) and the point of intersection of the perpendicular drawn 1int from the supply curve on X-axis (ie: piste on the supply curve where we want {0 colt the supply elasticity) with X-axis (point figure) ie. distance AB y Quantity 0 ORE x Quantity @ Fig. 14 Measurement of Price Elasticity of Supply Itis clear that in Panel (i) of Fig. 14 that, AB is, smaller than OB. Therefore, the supply elasticity & is less than unity. In Panel (ii) supply curve $,S;, when extended, meets the X-axis at the point of origin so that AB = OB. Therefore, at point K on $,S,, the elasticity of supply & will be equal to one. However, the supply curve S,S, when extended meets the X-axis to the left of the point of origin (O) so that AB is greater than OB. Therefore, the elasticity of supply AB is greater than unitary. OB We have explained above the geometric ‘measurement of the elasticity of supply at a point on the straight line supply curve. But if we want to measure elasticity at a point on a non-linear (curve type) supply curve, the same general principle and method is used. At any point on 92 ty curve, a tangent i, ro ea IY point. Ths i explained in 5 on that BI, supply elasticity is to bees Jn iB ran the Supply Curve SS, We at point Het at point K on the supply «* a tangent vi is extended £0 meet the yy A we joint K, the slope of the BS at A. is pit to the slope of the tangey supply curve is x. Since AB is sma 8, the supply elasticity here is less than un In the same way, we can estimate the p clasticity on any other point on the supply by drawing a tangent at it. y da é 2 3. Nature of the comm determinant instance, the }} A % reatively m be stored a the market ¢ Sods, The 8 Quantity Fig, 15. Price Elasticity of Supply on a Nondinea Gt If the tangent drawn at any point & supply curve intersects the X-axis, the elas of supply at that point is less than unity li fangent passes through the origin, elasti! supply at that point of tangency is equal 10% If the tangent intersects the X-axis to the the point of origin (O), elasticity of supe more than unity, 1 ome Of Which are as follows: * Behaviour of Cost of Production: ast] of Supply depends on change in 5 | cute aUcing additional quat Put. If an increase in outPt increas, ot industry causes only # “Se in their cost per unit of I FRANK ISCally Ny the ply sine yon! eo nit! ast yal 5 the decrease in cost per unit, we would expect supply to be fairly elastic. If, on the other hand, increase in supply leads to a large increase in cost of production, would be relatively inelastic. the supply 2. Time Element: Time period is an important determinant of elasticity of supply, Supply of a commodity, in the ultimate analysis, depends upon its production. A price change due to change in demand for a commodity may have a smaller response in the quantity supplied in the short-run since the production capacity may be limited. Therefore, in the short-run supply tends to be relatively inelastic. However, in the long-run, new plants can be set up and production capacity can be expanded. Therefore, in the long-run supply tends to be elastic. In general, supply elasticity is likely to be higher in the long-run than in the short-run. 3. Nature of the Commodity: Nature of the commodity is also an important determinant of the elasticity of supply. For instance, the supply of durable products is relatively more elastic. Durable goods can be stored and hence producers can meet the market demand by running down their stocks. Therefore, supply of such goods can be increased or decreased quickly in response to a change in price. On the other hand, supply of perishable goods like milk and vegetables is relatively less elastic ‘These products cannot be stored. Change in their supply has to be largely through change in current production only. Thus, commodities which are perishable in nature have inelastic supply while durable goods have elastic supply: 4, Availability of Facilities for Expanding Output; The response of producers to change in price depends on the availability of production facilities. If producers have sufficient production facilities such as availability of raw materials, power, ely 6. they would be able to increase their supply in response to rise in the prices of the commodities. The supply, therefore, will be elastic. But, on the other hand, if there is shortage of power, fuel and essential raw materials, the output would be expanding slowly in response to increase in prices of the commodities. In this case, supply would be relatively inelastic. . Nature of Inputs: Elasticity of supply depends on the nature of inputs used for the production of a commodity. If the production of a product requires inputs that are easily available, its supply would be more elastic. On the other hand, if it uses specialised inputs, its supply will be relatively inelastic. In general, the more easily additional units of inputs can be acquired, the higher will be the supply elasticity. Nature of Techniques of Production: If the production of a commodity involves complex techniques of production, the supply of that commodity will be inelastic because supply cannot be increased easily. On the other hand, goods which require simple and modem techniques of production will have elastic supply. Factor Mobility: If resources can be easily shifted from the production of other products to the production of the product whose price has increased, the price elasticity of supply will be more. In general, the ease with which factors of production can be moved from one use to another will affect the elasticity of supply. The higher the factor mobility, the greater will be the elasticity. Risk-taking: The elasticity of supply is determined by the willingness of the entrepreneurs to take risk. If entrepreneurs are willing to take risk, the supply will be more elastic. On the other hand, if entrepreneurs hesitate to take risk the supply will be inelastic. “OF SUPPLY AND PRICE ELASTICITY OF SUPPLY 93.s of Elasticity of §y ant Poly By Future Prices: If the (ipaéermiinants Sag 9. Expectation about Future ee at e Producers expect a rise in the lie i ks 1. Cost of Producti ” cers will li inh vr commodity in future, producers will like 2, Time Facto él ! to hoard the commodity to take advantage a: Naaretete ae » . of a rise in the future price. The ee 4. Availability of Facilities for Expan elastic in the curren g da ’ will, therefore, be less elastic in t Producti i e other hand, if they expect ture of Inputs yp Period. On the other hand, if they aes 5. Na ; ; a fall in the future price, they will ro 6, Nature of Techniques of Production , the goods from their stocks. The supply 7, Factor Mobility tt will be more elastic 8. Risk-taking 3 oe 9. Expectation about Future Prices of t 5 Me 1 2 quantity of a commodity which one firm is willing to p nie and offer for sale at a particular price during a specified period. : A an * Market or Industry’s supply is the quantity that all the producers are willing to prod of I and offer for sale at a particular price during a specified period, + Determinants of supply Prices; 4. Prices of related p 7. Policy of taxation and 5 10. Agreement among prod: * Law of supply states that, that firms will produce and are: 1. Price of the commodity; roducts; 5. Techniques of Producti ubsidy; 8, Expectations about fut ‘ucers; 11, Availability of transp 2. Goals of the firm; 3. In ion; 6. Nature of the i ‘ure prices; 9. Natural fe ‘ort and communication fa le, the quantity of any in its price and falls other things remaining the sam offer for sale rises with rise * Explanation of law of supply is in terms of, with more Production, Gd) Increase in cost of production, @ Larger profits associated Aili) Increase in prospective sellers wig, tise in prices * Supply schedule is 6 tabular statemeny Showing vay willing to produce and sell at various Prices during i 1, Individual supply schedule, jg 2. Market supply schedule, j,¢. * Supply curve is defined as the curye Which sho, Producers are willing to produce ang tell a¢ diferent ou two types: (i) Individual supply Curve, (ij) Market Prices A supply curve is normally Positively Supph Backward clanine « cen IY crams