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    7 views17 pages

    Managerial Economics Part 2#1645836230043

    Uploaded by

    Sandesh Hambir

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    © All Rights Reserved
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    MANAGERIAL ECONOMICS PART 2 + bot obobobbotob tt DETERMINANTS OF MARKET SUPPLY MEASUREMENT OF ELASTICITY OF SUPPLY INDIVIDUAL & MARKET SUPPLY SCHEDULE LAW OF SUPPLY WITH ASSUMPTIONS & EXCEPTIONS ELASTICITY OF SUPPLY & ITS TYPES DETERMINANTS OF ELASTICITY OF SUPPLY CONCEPT OF REVENUE, TOTAL REVENUE, AVERAGE & MARGINAL REVENUE OBJECTIVES at Ans. Where, O B) cS) KEY POINTS :- CONCEPTS OF TOTAL OUTPUT, STOCK & SUPPLY CHANGE & VARIATION IN SUPPLY TOTAL COST, AVERAGE COST & MARGINAL COST | OR : Explain the concept of total output, stock and supply. Define Supply. A) TOTAL OUTPUT :- Total output refers to the total quantity of a commodity produced during a given period of time. Itis produced with the help of four factors of production Land, Labour, Capital & Entrepreneur are the four factors of production These are also known as ‘agents’ or ‘inputs’ of production. Thus total output is a function of inputs ie. O=F(l) Total Output F = Functional Relationship | = Inputs Total output forms the basis of the stock and supply of seller. Total output produced by a firm depends upon use of available resources to their optimum level aa | quantity of scaly availabe for set the total quantity of a comm or salen ther rock refers f° tiers to the entire quantity of a commodity which is already produced ‘and is in existence with the seller. Stock is measured at a point of time. tential supply. It is the source of supply which Li ort Seas ics years production. Stock of commodity is a like pete ani ‘supply is flow. Stock can be equal or more than supply. ae urable goods the entire stock of goods is not offered for In case of durabit red godown, The seller would offer the entire stock sale some part o! ie ees. uiBut in case of perishable goods there is no Beate een eu stock and supply because these goods cannot be stored, ifference . \ SUPPLY : dity that prodi I ount of a commodity that producers are able Supply refers to the aot arket at a given price. Supply can be less and willing to offer for sale (© "5 it cannot be greater than stock, since a than stock or equal tothe SCS 7 What he possesses. For perishable Producer cannot sell i “tepply can be the same. For durable commodity eaamodity, the sto Ran ‘supply. ‘Supply is a relative term. It is related to stock can be grea ime, place and person. ——— According to Paul Samuelson Prices & the amount of goods that produc Thus from above we get some ¢ 1) Quantity of commodity 2) Willingness to sell 3) Price of commodity E oe ian : The supply of sugar is i : e270 ee “4 : is 100 kg al h t of supply. If we say the supply of sugar is y iq Eorirlsts ee eaeeh supply which explain the pipe sn time period dy the period of supply. Thus supply is a relative o = — is * the relation eateers are willing to supply”, intial elements of supply Q. 2: What is Supply Schedule? Explain with the help of individual a Market supply schedule and curves. Ans. A) SUPPLY SCHEDULE :- "The concept of supply was introduced by Alfred Marshall in his bg “Principles of Economics" in 1890 According to Marshall :- “Supply is the amount of commodity which a seller is able gq willing to supply at different price level during a given period of time.” Supply schedule is a table which shows the different quantit supplied at different alternative prices. Supply schedule are of two types: individual supply schedule and Market supply schedule. 5) INDIVIDUAL SUPPLY SCHEDULE AND CURVE Individual supply is the supply of single seller. The supply sched of an individual seller can be defined as a table showing various quant of a commodity that would be supplied by him at different alternative price at 2 point of time or during a given period of time. This is shown in the following table :- INDIVIDUAL SUPPLY SCHEDULE INDIVIDUAL SUPPLY SCHEDULE Price per Quantity supplied Apple (in 2) (in kgs.) 5 10 10 20 15 30 20 40 5 2 50 The above supply schedule shows that individual seller is re supply more at higher price. At the lower price of & 5, he is ready to sell 10 kgs of Apples. As the price started increasing he ie ready to supply! guaptbygat the higher price che 25ihells ready tolsall larger quai kgs of Apples. |t shows supply and price are directly related. It can be more clear with the help of diagram = ¥ 9 ao Sly Curve See (+ve Slope) e lo 5 fe} x oO 20 30 bo sO a ‘Quantity Supplied ‘° one 2bove diagram quantity supplied is shown on x-axis and pri 7 price is shown on y-axis» SS is the supply curve sloping upward fiom leftto right. As the Price and quantity supplied are directly related, the supply has positive slope. ©) MARKET / TOTAL SUPPLY SCHEDULE AND CURVE :- Market supply is the supply of various sellers at different price level during a period of time. The market supply of a commodity can be defined as a schedule indicating various quantities of a commodity that wollid be supplied by all the sellers at different alternatives prices ata point of time or during a period of time as shown below :- MARKET SUPPLY SCHEDULE Price per i All Sellers apple stuart SUBpUed Total Quantity (in) Seller 1 | Seller2 | Seller 3 ‘Supplied 5 10 20 30 60. 10 20 40 60 120 15 30 60 90 180 20 40 80 120 240 25 50 100 150 300 3 The above schedule shows that various suppliers are ready to supply different quantities at various price level. At lower price all seller are ready to offer quantities to sell but at higher price, more quantities are offered by different suppliersIt shows the direct relation between price and quantity supplied S Be Market Supply Curve Q0 (+ve Slope) 215 os \o aa oD x - Tso BuO 300 i © 6 Quantity Supplied MA loping upward from left to right» As price ig he Moses act alan, Ie al eve cite pas and quantity suppl d to individual supply curve i wks compare' itive slope:/AS ‘i ke flatter slope. Cone are the determinants of Supply? What are the Causes of changes in the Supply of a Commodity? |” (0. ‘08, ‘10) (M. 11) OR What are the factors influencing the Supply of a Commodity? Ans. A) FACTORS / DETERMINANTS OF SUPPLY :- | 1) 2) 3) 4) 5) 7) 8) 9) 10) 11) 12) 13) 14) 15) There are number of factors influencing the supply of a commodity, They are known as the determinants of supply. Important determinants of supply are :- ( Price of the Commodity :- Price is the single largest factor influencing the Supply of a commodity. There is a direct relationship between the price ang the supply. Higher the price higher the supply and vice versa. Price of Other Commodities :- Prices of other related commodities jg also the important determinant of supply. The producer will decide to supply that commodity which will give him the highest price in the market. The Cost of f Production :- The cost of factors of production jg one of the determinant of cost of production which determines the level of _ output. If the cost of production is less, the supply will increase and vice versa The State of Technolo: The supply of a commodity depends upon the technology used. Advanced’ techniques are the powerful forces used to increase the supply. Transportation Facilities :- Supply is also influenced by the availability of Means of transport. If transport facilities are easily and cheaply available for 2 particular commodity, its supply will increase. Government Policy :- Government's economic policies like industrial Policies, licensing policies etc. influences the supply. If the industrial licensing Policy of the government is liberal, supply will increase. Natural Environment or Climatic Conditions :-\ If the climatic conditions are favourable, supply will be more and vice versa) Weather conditions. floods, droughts, epidemics etc. affects the supply of goods, especially agricultural goods, Factors Outside the Economic Sphere :- Factors like war, fire. earthquakes etc. may destroy the productive assets of a commodity and curtail ‘or stop future supplies Period of Time :- In short period, supply would be less and in a long period, supply would be more. Seller's Expectations :- If a seller expects the price to rise in future, he will reduce his supply at present and vice versa Self Consumption :- If the producers like farmers keep a large portion of their produce for their self-consumption, its supply would decrease and vice versa. Goals | Motives of Producer :- Generally producer have two motives. (1) Profit Maximisation. (2) To capture Market. These motives on pero reiucors supply at higher price to maximise the profit and some er price to capture the market. Pesaran ie See wer Picase of Export Supply in domestic market will reduce and Import will increase the level of supply in the a id Taxation :- If low taxes are imposed on commodities and more su i ‘ill i e versa. are given, the supply will increase and vic E N ae of Market :- (in competitive market supply of goods and sone ie aeaee ip stand in the market. But in monopolistic market condition mon will restrict the supply in order to enjoy more profits» ‘ Be \ lle ihe Law of Supply was gi given by diferent piceaneral marker’ & Sele 8) STATEMENT OF Law oF suppLy fe According to Marshall hone gree DE OA Mere spo mae unt ‘Other things being equal price & quantity supplied are directly related.” “Other things bei ng equal, a seller is ready to expand the quantity when price tise & contract the quantity when frig Kile” The law thus, suggest that-the supply is directly proportional to price. ©) EXPLANATION OF LAW OF SUPPLY :. EXPLANATION OF LAW OF SUPPLY The law of supply can be explained with the help of supply : schedule & curve, | 1) Market Supply Schedule :- It can be defined as a schedule showing different amounts of a commo dity that would be supplied by all seliers at various alternative prices at a point of time or during a period of time. MARKET SUPPLY SCHEDULE TIARKET SUPPLY SCHEDULE y Alfred Marshall, In this law he 's while supplying commodities at Price of Ball Pen Quantity Supplied I 10 100 20 200 C 30 300 40 400 50 500 i In the above schediile) in first column we hav e prices and in second column we have shown al 9 Brecinene copped or offered for sale by the sellers at e shown different ternative quantities the different prices. i the market supply schedule that more is offered for sale ug ata Re een less at a lower price. It shows the direct relation by E quantity supplied and price. tween i ‘ket supply schedule on a upply Curve :- We may plot a mari I balan q Reenter: get a market supply curve. a ly curve is the graphical representation of the market supply Schedule "Market supply is given as Below = f supply. | we ns. A) LAW OF SUPPLY :. The Law of Supply was giv. ‘ i by Alfred Marshall. In this law he explains the general tendency of cai il i ities at different prices in the eee ch sellers while supplying commodities STATEMENT OF LAW OF SUPPLY :- According to Marshall :- wahe, other things being equal, supplier is ready to supply more quantity at higher price & less quantity at low price.” “Other things being equal price & quantity supplied are directly related.” “Other things being equal, a seller is ready to expand the quantity when price rise & contract the quantity when price falls.” The law thus, suggest that-the supply is directly proportional to price. C) EXPLANATION OF LAW OF SUPPLY :- The law of supply can be explained with the help of supply schedule & curve. 1) Market Supply Schedule :- It can be defined as a schedule showing different amounts of a commodity that would be supplied by all sellers at various alternative prices at a point of time or during a period of time MARKET SUPPLY SCHEDULE Fr Explain the exceptions of law of Al I B) Price of Ball Pen Quantity Supplied 10 100 20 200 30 300 40 400 50 500 In the above schedule, in first column we have shown different alternative prices and in second column we have shown alternative quantities of ball pens supplied or offered for sale by the sellers at the different prices It is clear from the market supply schedule that more is offered for sale ata higher price and less ata lower price. It shows the direct relation between quantity supplied and price. Market Supply Curve :- We may plot a market supply schedule on a Market Supply Curve graph and get a market supply curve. Market supply curve is the graphical representation of the market supply schedule. Market supply is given as below :- 2) 5° . measured along aw ‘As shown in the above figure, prices Nie ni we plot these figures and the number of pens along the X-axis. ee. d anata graph paper, we get a number of Pore, ae pea market supply cy these points are joined by a continuous line, we 9&8 8 TST or i clear that suppl SS sloping upwards. It is very clear Na ore ly curve. @ versa as indicated by the upwar \9Y ASSUMPTIONS OF THE LAW OF SUPPLY :- , The law of supply is based on the epee seen ae 4 14) No Change in the Cost of Production :- If the cos! ris : price rises but the seller will reduce its supply. So it is assumed that therejg No change in the cost of production. : 2) No Change in Technique of Production :- If the technique of production is changed, the cost will be reduced and the seller would supply more even at reduced price. So it is assumed to be constant. 3) No Change in Government Policies :- If government imposes new taxes or new duties, price and supply will be affected so it is assumed tha} government policies do not change. 4) No Change in Transport Costs :- The transport costs is assumed to be constant as any change in it would affect supply. 5) No Change in the Prices of Other Related Goods :- It is assumed tha \there is no change in the price of related goods, i.e. substitutes or complementary goods so that the law can operate. 6) No Speculation :- The law assumes that the sellers do not speculate, ie they do not expect the prices to rise in future else they may not increase their supply and the law will not operate. 7) No Change in Self Consumption :- it is assumed that the producers 4 not retain for self-consumption a larger amount of commodity than befor 8) No Change in Weather Conditions :- It is assumed that there is no chang? in weather conditions else the law will not operate especially for agricultural commodities. 9) No Change in Natural and Other Resources :- It is assumed that thee = ‘no change in the availability of natural and other resources to hold the lawas atu 40) No Change in the Scale of Production :- It is assumed that the scale production remains fixed. If there is any change in the scale of produeto™ the level of supply will change and the law will not operate 11) No change in Natural Calamities :- Itis assumed that there is no chang? Natural Calamities like flood, drought, earthquakes etc. which affect on su» 12) No Change in Goals of Producer :- itis assumed that goals of p should remains the same _E) EXCEPTIONS TO THE LAW OF SUPPLY :- 3 The law of supply states that more quantity is offered at high Pts- less at low price. But this law is not applicable in some cases which known as exceptions to the law of supply. 4) Labour Supply :- \In the case of labour, as the wages rises, the i would wish to work for more and more hours. But this will be upto 2 i point. After this point, if the wages rises, the labourers would not ' more and more hours! They would prefer rest than work after gettin: ‘amount of wage incame. We Itis more clear with the hel P.of following example. Wage rate (%) Total Wages (2) i 8 80 10 120 14 12) 168 16 10 160 In the above schedule we observe, when wage rate is € 10 per hour. Labour is ready to work for 8 hours when wages increases from ¥ 10 to 12 _and & 14, he is ready to work more than 8 hours to 10 hours and 12 hours. But after some time he gets tired. Instead of working more he prefers to rest. «(Se when wages increases to ® 16, he is ready to work less for 10 hours. It is more clear with the help of following diagram. 4 yb: = Bending SS Curve of Labour Wage Rate 1 OueP eel one SS of Labour Hours In the above diagram, supply of labour hours is shown on x-axis and wage rate on y-axis. SS is bending supply curve of labour which is sloping upward from left to right, but after certain point it is bending backward from right to left. T! law of supply is not applicable to supply of labour. 2) Savings :- Supply of savings is also an exception to the law of supply initially Savings increase with increase in rate of interest, But after a particular time, supply of savings may not rise with rise in rate of interest. Because, Majority of people who save have fixed income. 3) Hoarding :- Hoarding means stocking. If the price rises and the sellers expect the prices to rise further, he may hoard the stock and decrease the supply even at the rising prices 4) Immediate Need for Cash :- If the seller needs some money urgently, He would supply more even at lower prices. 5) Rare Goods :- The supply of rare goods such as paintings, old stamps et Recescarly remains fixed, Even at the higher prices, theit supply carrot tes increased 6) Self Consumption :- If the producer require more goods for then even at higher price he will not supply more and vice 7) Future Expectation :- The law supply is not hold goods in Expectation. If seller expects the price rise in near future, he wah ena Supply and vice versa. rishable Goods :- The seller have to sell perishable fish, fruits, flowers etc. even if price falls. They cannot wat eee for price to rise. + gt iige self consumption versa Ue . ~ — , ign one ri of outdated & eae E Supplier is ready fo supply evew more at less P ell their to law of supply. ‘on, sellers are forced to sell thelr g 10) “Recession + uring tere*jaring recession purchasing P i ‘ ions t es A above are some of the exceptions the law do not stand good. 1o the law of supply, ion in Supply. !: Explain the causes of Changes & Variation in Supt ee aren jz aaee be due to variation in supply & chai supply. e ty ) ARTO IN SUPPLY :- When quantity aa of eae Be due to change in its price other factors remaining variation in supply. Variation is of two types oe a) Extension of Supply :- Extention of supply ee ee n Sua supplied due to an increase in price of a commodity, ee aon constant. Extention of supply leads to an upward move! along supply curve due to rise in price let us Explain ‘- LN S iB, A Price ° aq ie Quantity Supplied Extension of Supply In the above diagram as price rises from OP to OP; Supply al from OQ to OQ; resulting in an upward movement from M to N along: supply curve SS. It is known as Extension of supply. b) Contraction of Supply :- Contraction of supply refers to a fall in the in price other factors remaining constant. Ther: along the same supply curve. quantity supplied, di e is a downward mi Qa Quantity Supplied Contraction of Supply In the above diagram when Price fe fall also fails from OQ to OQ, resulting in = peer rove j along same supply curve SS, {tis known as. Contraction of CHANGES IN Riis or pee iP supply is shown by common” shine ae aye acces _ a) Increase in Supply :. Whentners| i: ceen ei #aetease in Supply ere is rise in supply of ci to favourable Changes in other factors such as Gectaael nlerieeee Nate decrease in tax, tech; the right of oc, ° Supp cal UParadation etc. The supply curve shifts to vs Qa Quantity Supplied in the above fig. supply increases from OQ to OQ, at same price OP. igouting in rightward shift of supply curve from SS to §.8,, It le Frown ag increase in supply curve. Decrease in supply refers to a fall in supply price faotae tS Same. Supply decreases due to unfavourable changes in other factors such as increase in input prices, increase in taxes, technological Sa SsR ation etc. The supply curve ships to left hand side of original supply curve. ie b) Decrease in Supply Price ° Quantity Supplied In the above fig. Supply falls from OQ to QQ, at Some price OP. This results in a leftward shift of supply curve from SS' to S, is known as decrease in supply. &6:Expiain the concept of Elasticity of supply & types of Elasticity of supply. ; TICITY OF SUPPLY :- fens) CONCEPT OF He INGHRTEENER nats cusnmanee change in ; he concePodity due to'a given change in price of the commoaine Ne ee ionpoly can be defined a6 a ratio of percentane, change or Plasticity of supply quantity supplied to the proportionate change in Proportiona Price. % change in Qty Supplied Es = % change in price ; ein Qty supplied = change in price —— hangs Sept Original price = AQ A 4Q x PB Q es Q AP APs yi Price Elasticity of Supply AQ = Change in quantity supplied. Original quantity Supplied AP = Change in Price P= Original Price a 0 8) Ive, PRICE E| Ty OF senda There are five types of price Elasticity of Supply : 1) tly El: (Es = a): With a slight change in price theory is infinite change i ore a & if there is slight fall in price supply becomes zero. Then it is sai Perfectly Elastic Supply, vn P = I OS x Quantity Supplied Price In the above diagram, Quantity supplied is shown on “ axis & Price: ‘Y’ axis. Elasticity of supply is infinite. ‘SS’ supply curve is. horizontal st line parallel to X axis 2) Ferfectly Inelastic Supply (E, = 0) : When change in price brings no change in quantity supplied it is as Perfectly Inelastic Supply. Here Elasticity of supply is zero, Quantity Supplied Itis Seen that whether price falls from OP to OP, supply remains same at OQ. Supply curve j parallel to 'Y’ axis. 3) Unitary Elastic Su E = 1):- When a change in price brings about a Proportion: supplied then it is unitary elastic supply. Here Ey = 4 OP, or rises from isa tical ate change in AO iit Quantity Supplied li ' a rice a the, eae Ag uaa eupplied ines, from OQ to OQ, with a rise d is ein ie 4) esi cuPPlY curve is known as Bisetor deme Pee, oaual 19 change in ) Relativel /More Elastic Supply (E,> 4) :- When change in price brings as Relatively an proportionate change in Quantity supplied then’ ite kooon 50 evely, Elastic demand. Here price-elasticity-of supply ly mare then Yn 5 Bo es 7\ Ei ° Q oy x Quantity Supplied When price rises from OP to OP; Quantity supplied increases from © to OQ, which is relatively more in proportion to change in price. Hence supply curve has flatter slope. 5) Relatively / Less inelastic Supply (E, <1) :- When change in price supplied then it is known brings less than proportionate change in quantity si as less / relatively inelastic supply. my S GC \ ge bax a P Ss Oa caam On > x Quantity Supplied ice rises from OP to OP, Quantity supplied increases fiom 0a Poon Vehich is relatively less to change in price. Here the eu ly curve has a steeper slope as Price Elasticity of supply is less than one has a steeper slope &.7: Explain the methods of Measuring Elasticity of supply Ans. A) MEASUREMENT OF ELASTICITY OF SUPPLY :- Method :- ple ine : aie Elasticity is measured as a ratio of Percentage change zs eo pn ns plied td percentage change in price. aS F ———————— Peer % Change in quantity Supply 7 % change in Price = aQ xP AP alg ap P For Eg :- Suppose 100 kg potatoes are supplied at a price of & 8 and at £10 supply expands to 126 kg. Pe oo ee Q AP AQ is 25 (125 - 100) AP = 2 (10-8) A 28x 8-1 SoE,=1 100 = if answer is one then it is unitary elastic supply, if answer is more than one, it is more elastic supply & if answer is less than one, it is inelastic supply. Elasticity of supply is always positive 2) Geometric / Point Method :- In Geometric Method, elasticity is measured at a given point on given supply curve. To measure price elasticity of supply at a given point on given supply curve, a tangent is drawn touching the supply curve, which meets X- axis at a certain point. Then a perpendicular is drawn from point ‘A’ E, = = Intercepts on X - axis Quantity supplied at that price Following are the three different cases of Geometric Method. a) More Elastic Supply :- (Es > 1) Y Quantity Supplied ! In the above fig. Quantity supplied is shown on X axis & price +y’ axis. Tangent NN is drawn touching supply curve SS at point A. At ee A tangent is extented beyond Y axis, so that it meets the extended x axis point N now at point A Elasticity of Supply is Eee Ne oQ- asNQ > 0Q/S0Es >1 Unitary Elastic Supply :. &, = 4 ug Zon Cee Na=0@ g | , L ok & us Quantity Supplied In the above diagram Elasticity of Supply is E, = co 1 Heneé NQ = 0Q The tangent NN to Supply Curve SS Passes through the point of origin. Hence Eg = 1, the supply is Unitary Elastic c) Less Elastic Supply :- (E, < 1) N@Q@

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