— 72 fixed factor of not increased, sing returns to ortions. Here, leading to cur eventually n control, ete ited by na ney cannot be hamberlin in sto scale are 1? CHAPTER 8 Supply Factor and Economies of Scale In ordin: different meanings. It may mean the total stock of goods in existence. It may also mean the amount of goods offered for sale perunit of ime. Economists agree that supply means the commodity offered for sale at a price. This means that ‘supply’ refers to. total supply offered for sale at a price; by retailers and wholesalers. ary language, the term ‘Supply’ may have several Sometimes, the term market supply is used to denote the supply of perishable commodities with the retailers only. Supply is defined as “how much of a good will be offered for sale at a given time”’. Prof. McConnell defines supply in the following term : “Supply may be defined as a schedule which shows the various amounts of a product which a producer is willing to and able to produce and make available for sale in the market a each specific price in a set of possible prices during some given period.” Supply and demand are two important concepts that link the market behaviour of the consumer with price. The behaviour of supply factor will be just the opposite of demand factor which we ‘uve studied already. The price factor is the resultant of both Supply and demand factors.aemcdity i is there Sears there a problem of supply aly wit tag, goods are produced only Se iceman of foo ws pe Se carce in relation to demand. Se by thems Sori ats is tis 2h ont schedule soppy vd schedule, suppl of ilferent quantities pcg K smschedule. Supply is also related to tne vary supply: schedule. id price, ike onal rclationsbiP tier iven below is an imagin TABLE 8.1 supply Schedule of Commodity X Quantity supplied in Re units —_——— a 40 4 5 6 Price in 50 The Law of Supply From the schedule, we can understand that whe highest, ic,, RS7 per unit, the supply is maximum, i the price falls to RS3, the supply gets contracted to 40 urls there is functional relationship between the price and aval supplied. This relation is tated in the form of a law called the of Supply which is ust the opposite of Law of Demand. — 3. Soner and Hague, ‘Aeat ook of Economic Theor. (ELBS) P n the pi 90 unit ‘que Supply Curve the supP on certain assum; the supply sh except the pr other factors influencing kep ¢ factor, I (i) Number of depends on and selling the supply: the supply of supplyryone, it bess ntiful. Scarcity 8S nd. Yin scarcity 4 7 pen, of supply? y With aca sand thee needs are ples © le ply of produen’? hati pods With prise quantities pla With the help ot related to time, le represents the ipplied and the tule . the price is the 90 units. When to 40 units. So: e and quantity / called the Law and. ELBS), P: 20% IDrinw of supply states Fra commodity iad. AS Pics Of a coma bein SuPReprice falls, its supply ig cout? Ties, its gut HH quaning a Mues are supplied at highce mt acted.” tq CRP is extendey” qian lower prices, “MET Prices angt, tte? Words Tee i... - and small quanti se supply Curve nites ‘on the basis of the schedule supply curve taking quantities vot (Table 8:1) we igo the ‘YAN 28 shown in pgs i the a Figure 8.1 i s v 6 Bs a 2 s- {eee 40.50 60 7% a 0 100 QUANTITY SUPPLIED. The supply curve SS slopes upwards from left to right show lager supplies at a higher pric ce ‘of Supply TheSupply schedule and the curve are prepared and drawn op certain assumptions. The factors which are likely to ‘change’ the supply should be kept constant. The determinants of supply, cept the price factor, have been kept constant. What are the tiher factors influencing supply? (i) Number of Finns or Sellers : Supply. in a market depends on the number of firms or sellers producing and selling in the market. When the sellers are few, All be small If they are in large numbers the supply willbe soe ng, Hae oe sel he assumption that thetor and Economies OF of ems er of % en and constan the particular commodity Production producing p and the scale s eM tion are assumed t0 be constant is Hate of produc ny change in and rate Of Picon is not made, any change in num vii IF his a are of production, ete, will push up th trouble a i a abe ma | the quan supply the level of | c on i supposed Dy eterna comin baa interrupt coy of P will reduce the cae . t in techn (viii) — Change id. conse here will be an of production and Govertt Similarly a | ‘ern in supply. Simi S to existing ng or levy « roduction and decreased. Hence onstant to keep the | technology will increase (Oe, price o the supply | re consequently will get we keep the Sta iy curve at c supply (iy Cost of PH nadipo ity in the ( np (eas coe ate of interest As the above fa ne wal a raw materials, that the supply cury tte, remain unchan production gets Hence, in order to reduced, th y will shift down, p all the above s (iv) Prices of related goods : It is that supply of supplied at highe a commodity depend rice and not on Contraction and E J to it. If prices Decrtiise in Suppl ing, many ular product As we made di distinguish betwee: increase and decre It ed that the seller sells the commodity or Bu plies the modity on the Other things re basis of the prevailing prices and he does not expect expand if there is any change im prices of that commodity. If he feels Price. This is expa that future prices will be highcr, he will reduce the | in prices of the c present supply of the product. If he fecls that future the supply curve as mpted to sell more at assum tior 7 sumption that there Various other { | hold go. (igher level or at | tothe right of th Te increased. i curparticular commodi sc scale of production sumed (0 be constant “any change in number tic, will push up the med that the level of rs constant. Generally y will reduce the cost iy there will bean y obstacles to existing xt of production and et decreased. Hence Feonstant to keep the of production is upply and so this is ages, rate of interest, ment, raw materials, st of production gets hift down umed that supply of its price and not on lated to it. If prices ™m producing many 1 particular product ne UP. | that the seller sells commodity on the he does not expect nmodity. If he feels he will reduce the he feels that future ted to sell more at sumption that there price. there is no change governed by natural Phis is more SO in crema Ted ig egfoM erating these factors are cotitliment of prongs assui rodeti to ion. So al ae a ie tai a Mi me be eat ee supposed (vii) Change in Gover Government or "nt policy will affect ot levy of excise duty on a cont uPA fesh tax price of the commodity and a's race will get afected. An iereasein tax wil supply and granting of aie ee supply tod anting of sty wil ens he Py. ssumed thal there i in the Government policy. 2 ore Ml Policy = Any ch ‘As the above factors affect the supply conditions, itis likeh ly ns, it is likely faite sior oc Mi he a Se ss pi ty cave hs pd Haves the above sated factors otstant. in tha! case mor vl fe supplied at higher prices and the law of supply wil hold good Contraction and Expansion of Supply { Increase and Decrtdse in Supply ‘As we made distinction in the case of demand, we have to disinguish between contraction and expansion of supply ; and increase and decrease in supply. J Other things remaining equal, cpand if there is a rise in price and contract if ther price. This is expansion and contraction of supply ‘due to change Ba prices of the commodity. In this case the movement i sont be supply curve as shown below in the suppy curve SS. Suppose Ne ‘sumptions we bave made change; the supply curv will be affected by “rious other factors we had studied and so the friginal curve will not fnld good, but a new curve will have to be drawn either at a Higher level or at a lower level. Ifthe new supply cv"= * ba ‘curve parallel to it, we mean that Vf of theo, a the left of the old the supply of a commodity will eis a fall inChange in SUpplyis 3s nage nt «5 difference between chars 8 chan ist change in demand ig 2 Sippy ce after some time nts takes ia se tme Te theca of demand. Very hog ‘oF, sae ee asin OF ihe © ive tine intthe supply. Short perigg' 5 52 here whenever price sea thay Me | Ymplies that the total guppy SUPP m 8 inoh as can be produce es Oe z Long period supply refers to chats | factors of production can bo arte the total supply, both with thee ° ih ) oo th the stocks Piictire | As stated already, the supply of, to various reasons. is tue th ay Supply eure 5,5 just below the origi ndicates thn | _chalnges im the supply of a comes the supply has increased. Thi ame olf pric price only serves as an incetne to OP lage quanties are supplied cUVeS,Srint | it may not be possible ty noes above the original curve, indi a has decreased, — | because the cost of increasing supply This means that for the same old quantities. are of productions are not availabe 0 supplied ic, OM, as indicated From this we cas | price of a commodity may nt resi understand that it may dered as a purely tra f : - | disturbance or it may be that the (@) A tower supply curve indica supply than | high -to cover average variable eo higher supply curve, which i smaller. supply (®) A movement on the same supply curve will expand | en of Supply and Hs Mea or contract supply depending on the price. At higher | The concept of laticity of price the supply will be exp and at a lower tells the responsiveness of supply Price the supply will be contractin pes commodity may be sale ~equses more than proportional (c) An increase in supply means, larger supply at the old ee ean Proportionate said to be inelastic if smait ch Proportionate change in supp Measures the adjustability of sy the ratio between th and proportionate follow: Price or the old quantity is supplied at a lower price. A decrease in sipply means, smaller quantity of supply At the\old)price or the old quantity of supply at 2 higher price, (d)ss y movement on this eu, nal curve, indicates that for the same old price Supply curve 5,5, just apply has decreased. OP lesser quantities. are ure. From this we can es larget supply than a dicates smaller, supply pply curve will expand on the price. At higher nding and at a lower acting arger supply at the old plied at a lower price: aller quantity of supply uantity of supply at wnge in Supply is as nay, Fence! between digas Boe ster oe fof demand. Very short ‘he © diminish ake {Bote tothe rear Th 8 factors of pr in supply be This eles to change Stockists and with anaes and with the etal : he supply nmodity may change du 0 ges in price do bring about Le nodity. However, supply. In practice, i ‘ ase supply. This may be either supply is 100 high or beeause factors , available. On the other hand, a fallin the y atin reduction in supply because \ transitional phase of an economic : he short period price is sufficiently Ejsticity of Supply and its Messorement ~~ = £ elasticity of supply, like elasticity of demand, supply to changes in price. The supply b = < astic if a small change in price t = portionate change in supply. The supply is ange in produces less than y. In bot (esi Jy to price. ‘his is expressed as ft ag ipplied e measuces the adjustability of supply to PPK the ratio between the finale. chang. in the suantit}s 24 } roportionate change in the price. The formula for this # follows =of a commodity + increases { PosGo per unit and can YOO, per unit and consequently the to 3,000 units. 7 anti nen Sa, plied by wi 2,000 100 Elasticity of supply = 4 In terms of symbols, we can write q+ Small change in quantity uppig J ap : Small change in price Pp: Original price re a | tes Ca) ana (+ wnat determines Elasticity of Supply ? am Elasticity of Supply depends upon various factors (i) Availabilty of suitable factors of production ; (ii) The time involved is the most important factor as the supply has to be adjusted to demand ; (iii) Whether there are possibilities of changing the technique of production ; (vi) Availability of markets ; (v) “How costs behave as output is varied is the criterion for changing the output: If costs~of production tise ‘rapidly as output rises, then there will not be much incentive to increase. the output as the extra benefit will be chocked off by increase in costs, So in such situations supply will rather tend to be inelastic, On the other hand if costs of production increase slowly as production increases, it will give more incentive 40 produce more as the price rise will lead to increase 4m profit, In this case, supply will tend to be elastic 0 a change in py ECONOMIES « are Seale of Production In modern days, the sae greatly increased and producti Fnportant feature of production offers Bost of production. Economics an an be grouped under iva cacy production which accrue tothe So that the cost of production w place the firm in a better p effectively. Economies arise 4 relating to efficiency of the en of the type of machinery used ‘These economies arise within the other hand external eco each memiber firm of the in | the industry Internal Economies of larg Economies available in output to make it a large s different headings as fll 1. Labour Economies specialisation affords defi produces on a larger 8 at reduced cost due to be labour to its optimum | increase as the firm ca | branch of prodiction——_i18m = r 1808 Th conclusion, we ma 4 many other factors in addiveytnt Manager Supplied fupplied. The time em eeeeianiy APPLY factor {om Rs. 2.099 ie lability o€ supply to tae ets oF decreaing Wy the quant acint of supply to a change ig M88 demand ee, ¢ elasticity of in price of the commas Y of ECONOMIES oF scaug “iti que Scale of Production SCALE In modern days, the 4 fF the size of th ily increased and" produeting@, mes et and_ production SS undertakings has Foportant feature of modern industral wes3 dustrial society. reduction offers certain adv; Fist of production. end which help in fan be grouped under two ices of large: a faternal-economics. Internal ecor ies; viz, internal economies and ity supplied, Sfoduction which accrue to the fem when i toesnas Genny Prthat the cost of production would ‘when ilespand the ouput, place the firm in a better position ome oom considerably and Effectively. Economies arise purely due to ee felating to efficiency of the entrepreneur or his ee ee or the type of machinery_used or the marketing, Meee ae These economies arise within the firm and help the ie ce the other hand external economies are the benefits ete Bae each member firm of the industry asa result ofthe expansion of the industry. factor as the Internal Economies of large scale Production rm, when it expands the = can be classified under leis a very Large-scale reducing. the le production | hanging the Economies available internally in a fir output to make it a large scale production, different headings as follows : L Labour Economies : Division of | = specialisation affords definite ‘advantages to the producer when he = produces on a larger scale. More quantum of output is possible ~ at reduced cost due to better ‘organisation of labour force by using = i is bound 10 wel. Quality of the product is boun nee Sa ‘specialists in 09 labour and consequent the criterion duction Fisesupply Factor and Economies of Scale ——— I. Technical Economies ji) Large-scale producers can intr (0 patie andre incest labour. Big machines canbe continous tothe filstcapaciy only when arg sale is erred on. Cheaper power is alo another atin (i) Under technical economies, we have the ben | out of experiments and research, A small afford to make costly experiments, fail. Big manufacturers can have ‘conducting experiments and rese technology so that the cost of considerably brought down, Hi research may not have a heavy impact on the eas unit sine the firm is producing enormous quanti (ii) Uslsaion of by-products in large-scale operation is another advantage to be discussed under technics Economies. This is not possible when the scale ot operation is very small. Small scale producers would simply waste the by-products or use it in an uneconomical way because the by-product may not be in suffient Quantities to dispose off profitably, If thie scale i sullicintly large, it will be worthwhile erecting a special Plant to trea! the waste products profitably. For example the scrap materials in-engincering firms can be used in Producing smaller articles like toys or nals. The coal-gas rofitably stored and sugar mills may not be used as fuel while ing health hazards. If excellent raw material lboard and paper and ‘mically, These valuable ao fits aii im cannat some of which may separate departmen, arch,to find out beret Production could je lige expenditure os marketed. Bagasse and molasses in be Profitably used. The former will the latter wall be thrown out pas (ee Salis lage the bagasse isan for the manufacturer of cardi 13 {Il. Marketing Economies - Pans targe scale production is the o (@) The large seale produc in buying as well as ‘materials, he can bargaining and bay t market. At contract with raw ma the cost of raw mate In selling also, he » capable of surveying of selling to his best rms. with retailers nomies of fr period with full ca cheaper wagon ies, ete. If tive adverts production, P mainly on effe through differe consumer. Larg up large scale the sales witho much as the ex output, the inet 1V, Managerial “conomi benefit. of managerial departments entrusting (0 ‘purchase’, stores, eling J be had in the general oy on the east of production | inthe size ofthe busines do just as wel 25 Tor a Rent, insurance char ore ely when the outputa} a Se . . Mar arket Econom Magerial. E BS ores im Na nies» Potha = PtO-date aici producian @DS, the bigge soe ginge sole production ge at Be eno ly used and ate! (The lange scale producer has betin ne cale productigs in buying as well as in acting fs Aining pone ther advantage materials, “he can slice off pn Me the raw benefits arigy bargaining and buy the raw materarin °, ‘tetive all firm cannee market. An efficient producer will ene sy¢t aes of which may contract with raw material suppliers and thoy soe te departmen? the ost of raw material atthe lowest penne eee? ind out better In selling also, he will have:better sents oe ion could be capable of surveying a larger market ene Denditure on of selling to his best advantage and effecticy, gos ‘the cost per erms with retailers, vee S quantiticn: (i) Economies of freight is another advantage to } operation is large-scale producers. He can bargain effectively with er technical gomovers as he can employ them for a fairly long he scale of period with full cargo. The large scale producers get icers would cheaper wagon load facilites, containerization economical facilities, etc. If costs of freight work out cheaper a sufficient he cam as well have his own truck of let of trucks ie scale is (iii) Effective advertisement is possible only in large-scale 6 @ special production. Present day marketing success depends ot example fhainly on. effective and enormous advertisement pelmsesiis through different media to create taste for the 5 coalgas consumer. Large scale producers can afford to take sea up large scale advertisement campaigns {0 boost uP cost of production J ; may not ales without increasing thi my the ssa tributed over a large en much as the expenses will be t : avards. If mah cease ins pt wi i NEE i peer IV, Managerial -conomies : Large scale production es pes ani benefit of managerial specialisation by, eau So = valuable aera cats entrusting to cach a patina tem of 400" °C = bsidiary seater gores, selling ee. Furter, considera Se eg aoe terials in the general expenses. The over on to increase be had in the Bet ction do not increase in proport it goods) on the cost of production do ot eer and one votes duction in the size of the business. One Bn tory as for & in the size of the Piste maparatively large faCt0r) a ee, do just as well 25 10" Sy arges and taxes do not sane ced,IFIED ies of Scale Supply Factor u > Big firms command b Financial Econd V etter fin The Method making capital in a big joint-stock company is entiret w at any time at a favourable rate as ty They can borrow at a enjoy reputation in the market. They can issue debenture for deposits from the public offering interest or mak ie je company formalities. In s after satisfying hort big pratt’ can have command over finance at a cheaper rate VI. Economies of Survival : Large scale producers risk by diversification and this gives the strength of surv fluctuations would not affect them in a bigger w. spread their al. Market ay as they can easily manipulate the stock by channelising, storing, diversi; or keeping them blocked in different markets. They can shock I as absorb shocks in the marketing field create External Economies External Economies are the benefits accrui as a whole because ofits growth and the benefits are shared by all the firms of the industry. These economies are not generated by the firms individually, but a structure either created jointly or by the helping hand of the government, Such economies include specialised transport facilities, other commercial facilities and banking facilities created when an industry grows thicker in a Particular region. Even subsidiary industries started around the pucleus industry stand to benefit by the external economies created by the concentration of industry in an area, A common associ of all the producers éan effectively to the industry ion Project external facilities by conomies of disintegration, No an_be laid between internal and external €conomies when a number of firms in an dustry combine for Profitable business, Disadvantages of | le Production Wve should not conclude that large sits own darker features as well, Be ccvary Smet Be ct areas (2) Labour sb Been and cae Be io cin CH ee vases ene a Be oscars productive mechanism Biieshods.ccieai labour, an intransigent’ pechanism oot SPE4 (3) Large monopolistic comin federation. Monopoli consumer and also to if the organisation democraty, consume would lead to econo extent of threatenin; (4) Lastly, there be carried on by personal attention c embroidery is speci and gold and silve of artistic designs, personal requirem Large scale opera they are unable t there are many di Limitations of lar Although ther there is a limit t The limitations a boundaries in pr a.tay | better financig, The method ¢) ntircly differen as their shar bentures or ea or cal make huge loane big ans, Producers TS spread their urvival. Market ay as they ca ey can ag, diversifying 1ey can create ield, 0 the industry are shared by not generated ited jointly or omies include facilities and thicker in a { around the mies created n association facilities by to safeguard justrial area. oncentration, gration. No ind_ external sombine for Limitations of large-scale Production a depressionary Condition tg qyPTAd glut in Gy comparatively weaker” (0,tM® trad depressionary trend, its Would (2) Labour trouble ang operation with an army of WS is the labo ie employers and employees dogs OUTS. The come into clash with each. othe work, wages, leave Facility tet OM ind lockout would eventual nt lead to productive mechanism in the %, and methods arc enjoined in jabour, an intransigent Trade U, mechanism out of gear causin on omy, T} he rules ion woul 8 havoc t (3) Large scale produ, g i ction woul monopolistic combinations into uous cna lead federation. Monopolistic productio, consumer and also to labour as well well as to the economy in democraty, consumer interest, and labour protien tespa, would lead to economic concentration and finally it may go to the extent of threatening the government. ‘ ‘hough ve ld easily put the pr ee othe entire eeamomy. to rusts, cartels, syndicate or y prove detrimental to the (4) Lastly, there are certain lines of production which cannot be carried on by large scale. Articles requiring artistic skill, personal attention cannot be produced in large scale. For example embroidery is specially suited for small scale production. Silk sarees and gold and silver-laced garments, carpets of ‘excellence, shawls of artistic designs, ornaments of varied designs and shapes to cater personal requirements, etc,, can be produced only by smal scale Large scale operations merely turn out standardised goods and they are unable to satisfy individual tastes and customers ‘Thus there are many disadvantages in large scale operation there are many advantage: ch enlarge f of human, technicalSupp ly Factor and Econon The tat tinit eaNEMM Gao increasing difceg oes inimity of man nacre and $0 in agriculture. oh sranagement and supervision. This is more Seen he operations are spread over a large a certain stage, the enterprise _becc umbersome and el 7 P COMES to9. wee ne and unwieldy; consequently leakage, inefficiency and ‘ier MAY result. The task of supervision becomes difficult and as to be delegated to the paid sup _be watched as they have no personal interest in the Eventually it would lead to a system of checks and hecks leading to wastage of time, energy and money apism would be the final outcome and not production, — The second limitation arises due to technical obstacles in the way of expansion, Adequate capital, raw materials, power may Pose a limitation to production. The supply of high business ability or managerial skill may not be forthcoming. ieee visors Who mst counte Red. Thirdly, the economic limitation arises in the absence of technical improvement and technological progress. A point of maximum returns would be reached in production. When this optimum level of production is reached, further output would result in uneconomical proposition. The cost will be increasing on many counts and the profit margin would diminish. As soon as these disadvantages begin to manifest in production, it is desirable 10 start, another factory, rather than expand the existing uni indefinitely and face diminishing returns progressively Externally, marketing difficulties and increasing risks in production would act as deterrents to further production. With the expansion of output the cost of production will be increasing and the producers total revenue would be diminishing, The producer may have to stop where marginal revenue equals marginal cost. Price fluctuations in the market, vagaries of the consumers, changing policies of the government may increase the risk element and the producer would hesitate to expand production beyond a certain — fimit. SMALL SCALE PRODUCTION When production is carried on with small quantities of factors of production, the seal of production is said (o be small. In spite of growing tendency towards large-scale operations, small scale vion has got its owm place in the economic activities of Even in jadu Moduction has a role, production, the smal Pr etain peculiarities of fhe small-scale indust targe scale. ‘Certain occupation snd they could scale 4) The occupatig ys tailoring, embroid ‘a small scale. (i) Products frandicraftsmen on (ai) Some prod be produced only (iv) Some oceu on a large scale ; () Even indu (vi) Handiera a small-scale. Advantages of (a) The ma workers cannol (b) There i ecks and oi =xpensive in | (c) The t very cordial. the servants. Disadvantag \ (i) Bconc economies, 1 | ~conomies | ‘nall-scale |This is ml Over a }, ae ors iain pecaliartiea 6 ae Prbmall scale industt 'S Who must Certain occupations haye ple g. terest in the scale and they could Not be tape ae a7 © conducted cee and n and @) Bei occu ot : = money, a Se luiing Persona atention an ; Pewee, etc. can be conducts es acles jy : = ae (8) Products of artistic. excel cd rots tic excellence eee De stalls ae \ (iii) Some products do not ec be produced only on a small scale id wide markets and must sence of - point of (iv) Some occupations by their very nature can When this on a large scale ; for example : Agriculture. bbe conducted ut would (v) Even industries at the F 5 Sat the experimental stage hav casing on on small scale. perimental stage have to be run ; soon as ; : desirable (vi) Handicraftsmen who want to remain independent work on ung uni a small-scale. Advantages of small scale oduction (a) The master can exercise close watch on every one and the nsion of workers cannot shirk work ; pdneers (b) There is much of savings in maintaining books of accounts, — havehto checks and counter-checks which would be very elaborate and ; BEce expensive in large scale ; .angin, ite (c) The relation between the master and labourers would be certain very cordial. There would be intimate bondage between them an the servants would owe allegiance to the master. Disadvantages of Small Scale as labour : ‘ ‘ | tion, suc (i) Economies available to large-scale operation S08 or economies, marketing economies, technical econ omies: and financial ‘economies may nolticles of standard type cannot be produced scale. Of course, this difficulty can be minimised it small-scale. \ \ the eae or achinery ig a Used ina (#3) This method is unsuited to mass production to cater Wider mark, T markets, The disadvantages have been reduced by goverment taking the small-scale production. In many countries including India so™PtOVe industries have become complementary to large scale industries, Becmatt Seale special advantage in solving unemployment problem, the sma aes fis are encouraged by the governments, Review Questions PARTA 1. Define the term ‘Supply’ 2. Whatis a ‘Supply Schedule? ? 3. Enunciate the Law of Supply, 4. What is Elasticity of Supply ? ‘What is ‘Labour Economies in Production’ ? 6. Indicate some of the by-products in Sugar Industry. PARTB What are the determinants of supply ? Explain ‘Increase’ and “Decrease” in supply with figure. What determines Elasticity of supply ? What do you mean by ‘Technical Economies’ in production’ 2 What are Marketing Economies? Explain the term “External Bconomies’ of production. PARTC Explain Economies of Scale and different types of economies with illustrations. Analyse the advantages and limitations of Large scale production. 3. What is Small-scale production ? What are the merits and demerits of small-scale production ? 4. Bxplain and illustrate the concept of Elasticity of Supply: CHAP’. 5LB FDC SEP 2 CHAPTER 7 The main objective of progye commodities and’ services nr tction is to Satisty nganived activity of ansfonnits to all those things. whiten” frm ba Inputs refer product. Output means the quan 8% '© prod pradiced BY the frm for sling’ yt £ th input is wider in its scope than qe, USNS the i Inputs not only refer to faery things It also includes th © Process of production. © rendering of the = sence such as banking, insurance eae The pats of Biliegion 245 to the values or creaiga nites laa The money expense: ic, transforming resou st of bandon the production. The cost of ithe very existence of the firm. E ‘Business Economics’, p. 94auction func cae nto Output sp Pp analy ger \c pul ily a teal ¥ pvt for any stipul: " aN f ne are two br y nction tion producti oath ’ efyction function, 4 ; ‘a production pra «is Production Fonction ’ evel of output t what is | expresses the relationship betw m anit ee ieduction ss pecan SP inputs. If the ted L nation t avare transformed into physical outpye gadependent of ‘the of inputs. The product ranctio show. cchnology and managerial ability, the maximum mModuction process. Peiable proportion ed from different con cpt that can be obtai nations eee of cmtpas ates of outpes Wvactors during the period of time or unit of time foputs. For conve af the Projection function is a catalogue of output possibilities proportions function function can be algebraically expressed in an More precisely, quantity of output which the output is the dependent variable and inputs cendent variables. The equation can be expressed as are required to yiel produces banians is the maximum numb quantities of variou time, machine time, may also be defined g = FG BG dent) where ‘g’ stands for the rate of output of given commodity a, 6, n, are different factors (inputs) and services used per unit The rate of output ‘g’ is thus the function in the lactor services, a, b, c, d. put employed by the firm, per unit power, labour and 1 a given number of | he production function is the name given to the relationship between the rates of input of productive services and the raté of — 7 5 Each firm has i uutput of product. It is the economist’s summary of technological technical knowledg improvement in & production funcios function can be Row of output from for a lesser inp be reduced to 2* different combinate knowiedge. A production function which may be specific tie y be specified in mathematical or tabular form, is assumed t0 exist for cach commodity or service Scnaiagte conventional definition, a production function shows i prepa from any specified set of inputs, inputs and flows of services tation are imposed except be non-negative. Finally,pe supply side bi eal predction process in ion is a into physical output, he production shows ability, the maximum fferent combinations time of unit of time. of output possibilities ally expressed in an variable and inputs an be expressed as en commodity a, b, vices uscd per unit action in the input /the firm, per unit lationship es and the rate of ry of technological .d in mathematical amodity or service on function shows fed set of inputs, { flows of services re imposed except -negative. Finally, ae function i vibe Tinto output space is 2, tele valued ma K space in asm ‘mapping from i Siput for any stipulated set of were noe hire a00 10 broad clases of near punable portion production function’ rosustion f function Jn function : (i) Fixe production function, 3 and (ii) Variable eee roduc output ratio is oduction process is characterized by fred men pcre te mejable proportion production function ie cnc Peyote A Bee yokeouto6ichay- beypeoducedtyis peste japuts. For convenien or more combinati BE conta coe | abvall Pisum Heetionsof proportions functions are smoothly continuous, that’ variable fadependent of the sale of the same More precisely, the producti io quantity of output which can be i eo Of various inputs, or the mi ey cece eine inimum quantities of vz Heer ckquired co ield| aj given quan liyiof{ anita Sarees tat to of output. Suppose a firm produces banians in a day, its production fades HES the maximum number of banians that can be produced anes quantities of various inputs, such as yar, dye-stff, power, iat fime, machine time, floor space, etc. The production of that firm may also be defined as the minimum quantities of yarn, dye-sul poner, labour and machine tine, lor space requie fo produc fraiven number of banians per day. Each firm has its own production function depending on the technical knowledge and managerial ability. If there so improvement in technology and managerial ability, the old production function will be disturbed ‘and a new production rettion can be had. The new production function has a greater flow of output from the original inputs or the same flow ‘of output for a lesser input. The entire concept fof production function can be reduced to a schedule showing the amount of output OF ifferent combinations of inputs.sa eal mail wih BE SDI aide es pevncal psc the monctary terms of =o analysis d ysis deals with iy felt with the production function, Sine latter deals with the cost of sae in decision-making. Seer ephs ane thelr FON at is Production suction function et wh presses the relationship between itputs. Production is a 2 The outp tt ogy and managerial ability, the maximum logue of oulput possibilities prod combination rates of Si uotive factors durine-4 duction func fh the ou! dependent varial g =f labo 4 for the rate of output of given commodity ap, recent factors (inpuls) and services used per ey ate Gifs of output ‘gis thus the function in the input bg, dawn employed by the firm, per unit are the in wn) where ‘g’ stands of tin of factor services, 4 of time. seThe production function is the ndme given to the relationshi between the rates of input of productive services and the rate a of produet. It isthe economist’s summary of technological output knowledge." 'A production function which may be specified in mathematical or tabular form, is assumed to exist for each commodity or servic ‘According to conventional definition, a production function sh i the marimum output attainable from any specified set of in a ie, any set of quantities of ingredient inputs and flows of a pee inputs. In general, no further limitation are imposed a iat the set of inputs and outputs must be non-negative. Finally, 1. GJ. Stigler : The Theory of Prices’, 1953 p.106. peefuctio’ action utput space im ab 0 Say stipulated set of @ are evo broad clases production functi wy function. oduction process is d 1 of output technolo tev ae is. It the technologie of sopendent of the sale « jn del pr ion process is chara uc roportion product able P' ; feet Supt maybe For convenience, jap input tions functions are propor More precisely, the p sgantity of output which GP various inputs, of the Ore required to yield a g oduces banians in a d Phe maximum number o {quantities of various inp ime, machine time, flo may also be defined as power, labour and ma¢ ‘a given number of bar Each firm has its technical knowledge improvement in tec production function function can be had flow of output from for a lesser input 1 be reduced to a § different combinatideal mainly with the supp cals with phys Is with the monetary ter self with duction fone of he latter di the “atstion, jon-making, st of sses the relationship betwe it. Production is a proces j2 Sees hea sich T inputs The production weet managerial ability, the maxi? period of time or unit of goes quation can be expressed ag ut of given commodity a, 5, s the fu loye! n the input by the firm, per unit given to the ationship the rate of echnological services ani summary of specified in mathematical ch commodity or service. roduction function shows specified set of inputs, uts and flows of services tion are imposed except ¢ non-negative. Finally, rKéte are space in proportion pro roduction funct uaetion : (i) F p functio ed A production each level of output ye of inputs. If the tech independent of the production process i variable Proportion prodaa level of ouput ay Pee : fps roy hat Y Bodied by hms a Proportions functions are smoihly nti. that in which the same variable nian that canbe produced fae such as yarn, dye-stuff, power, labour may also be defied ase minimum quasite cre oe power, labour and machine time, floor space ve a given number of banians per day. Sno ON Each firm has its o1 roduction functi Pace ues men ode ction function depending on the wagerial ability. If there is an improvement in technology and managerial ability, the old production function will be disturbed and a new production function can be had. The new production function has a greater flow of output from the original inputs or the same flow of output for a lesser input, The entire concept of production function can be reduced to a schedule showing the amount of output for different combinations of inputs. quantities of variou: s inputs, time, machine time, floor ¢proauctio Fgueion Funct et ussite “eubodt Be vis ey of one ais me aroun of setter 2 the resection Tae eel sho Entpour anda th capital for capital shown Producti Guipit x per unit of time 6 692 Input 5 632 ei 4 564 Capital. eam 42 2 400 1 282 2 3 ar 2 ee cording tothe Table 71, when 2 usits of labour and 2 of eg ‘are combined as input, the corresponding Behe unit of time will be 564. The table indicat i iti ‘output when the input com St athe ae of 5 units of labour and 5 uni 1,410. In practice, all factors will practice, not be changed. In the Tit é f ged. In the Table, Pater sch 6 units of labour and one unit of capital (output rena pei are 48 that of the combination of 3 units ol capital, The producer has to make decision Accordir about these two cor aws of Production — “rable roducing a commodit a Ly, only ty su capital Fe required. raced with some combination, of wie, Along the Jeft hand side, the wre listed. It he amount of | fumns and FOWS may be called «cys Sf the columns and on the corresponding Go 8 combina: the output pital is made. TABLE 7.1 The Table 7.1 choy’ the we rising fom 1 t0 6 unity wit jabour from 1 unit 6 oe ais, ly. ion Function 980 1,200 1,386 1,550 ag 896 1,296 1,264 1,810 1559 300 980 1,128 1,264 1356 692 846-980 1,096 Lay9 564 692 800 8969 400-490 564632 6m Input of Labour ation is varied. At the combinations of capital, the output stands at Wing the same result. Which ‘on the price of the two factor: ich the factor can be increased funetion to take yucet ose F the factors 0 of getting the di HF bina’ Fst combination. J production s of Production opto so oducton Fos (Wis related « (ii) The technical remains cons (iii) The factors viable units (iv) The produc Cobb-Douglas’ Producti ‘Economists have atte fonctions. A famous ; Douglas’ Production Fu the US.A. have studies ‘manufacturing, industri function applies: not t manufacturing in the manufacturing product Cobb-Douglas pr manufacturing indust The function takes t Q=KL where ‘Q” is output of capital. ‘K” and “ ‘The conclusion « Jabour contributed increase in the ma and homogeneous ‘A significant P° cates constal it indies one P ig raised byAus the Production fun producer has to take jes the input ommodity, oni yew The Table 7, "Oi oductivity of the into acc le 7.4 sho SPU prod he factors ount ch hana ae OE tn ean cont combinant St ot, Hy RE, oem uae Nn ate a Sra tat {96 unin The Produ et responding compel” () Wis related to a sation (ii) The technical kn remains constant. (iti) The factors 9 5 tors of producti Viable anim Of Production are. divisible into moa <___ (iv) The producer is using the best tech 1,386 1,550 epp Cobb-Douglas’ Production Function iced Sai 1,264 1,419 Economists have attempted to examine m 3 4,550 functions. A famous statistical product yet Prodution 1,128 1,264 1396 Douglas’ Production Function, Paul H. Douglis ant CW Cong 980 1,096 the U.S.A. have studied the production f et 096 L209 n function of the American q manufacturing industries. In its original form, this product 00 896 ogg function applies: not to an individual firm but to the whole at 564 632 mp manufacturing in the United States. In this case, output is — manufacturing production and inputs used are labour and cafital. 6 Cobb-Douglas production function relates to American r manufacturing industries to labour and capital from 1899 to 1922. a The function takes the form labour and 2 units onding output per Q=KLCO™ rious quantities of where ‘Q’ is output, ‘L’ the quantity of labour and ‘C the quantity t the combinations of capital. ‘K” and ‘a’ are positive constants. - output stands at es ie the ‘Table, The conclusion drawn from this famous statistical study is that : Gai ital (output labour contributed about 3/4th and capital about 1/4th of the oe nits increase in the manufacturing, production ‘The function is neat jee and homogencous. It shows constant returns (o scale to make decision e result. of the two" an be im production function is that means that if each input : exactly increase by oneaws of Production wetion Funetion & DRESS ur dine: Is Prod er cent. I re event and profitable ia mm in Decision-making reduction Funetior Use of Pr has immense utility to the M, junction ; anager, reduction fnciog Tat atthe Firma level, 1 anBE ng Executives 2 va ways ow to obtain the optimum Output from a gi. of inputs; 7 sat Pow to obtain a given OUIPU from the minim @) inputs . Bi IM se ae of utility of employing @ variable input faq The value of Pe of tin be better judged with the "heig o" the prodvctnction. Additional employment ‘of they production rable only when the marginal revenue proqyato inp es eror i ore than is price Ii rations se een e variable top the additional employment of the lable factor at Pin nal revenue productivity equals its prj ce ee naan ad ana iceful in making long-run decisions. When the firm experiences the increasing returns to scale, it is profitable to increase ike oatput. Thus production function helps in making long-rn « well as short-run decisions. Optimisation and Factor Combination The most important factor exerting profound influence on the production function is the price. In fact, it is the price of factors that gives practical shape to the entire theory of optimisation and factor combination. If the element of price is introduced, the theoretical production function becomes practical oriented indicating least-cost combination or optimal combination. When the price is taken into consideration, the optimum combination of inputs is obviously that combination where the marginal rate of substitution between the inputs equal to the ratio bet f inputs. This is studied st | jetetreace sents atin vo uadersiand the mari be optimum combination, et PE so-quant CUINeS a firm has several methoe f the factors of produc oot that combination which equilibrium posit he study of equilibri ¢ for t analysis of [so-Produc as the «= Iso-product curve indicates The (which are capable of (0 These [so-product curves 3 oot or product indifference cu he different combinati give equal produc Table canes OF indicates the {abour’ Which Combinatio. The Table 7.2. indicates that capital, when combined as inp units, ‘The same output of combination B in which 4 units of capital. A im ae i by combining 6 unis of I When we plot thesé ne get Iso-product cane, The ig Tevel or to a lower ve catalogue of different cof of output can bs ‘Map or equal Pro1 ational produest wil wor gee and IIL are stages of eco? econ ig Sage where thee "At which particular point of°!l Of the See iy ePFesetce wall Pes @ MAXIMA decide to produce dpe, ducer ead oduees toe IL represents the range of ri ion of facto" he prices Of la 5 Robinson the law of variable pro pccording £0 1098 fo important factors. She maint peraes on ae20UN ated wth changes i the proportion, though the 1M erates duc to the fact that there is a limit we the factor Se proportions proportion, nt returns to ine and Iso- Jual product tors, viz., X re constant the origin OP is the sive equal the scale - DE. The data low, FACTOR ‘Y" (CAPITAL) 200 100 Units . FACTOR ‘OR (ABOU) jaance between the successive oe alOTE the scale line paseing they Product cury suit both factor x and factor y ee origin, we c iuilgven proportion, Output expand end Capa) wena’ i efore the figure displays conta a ee roe turns t0 scale, : es being a wera ‘This shows that a change in the amount of cenwin proportion causes a change in the of the factors in x roportion. Economists explain 1 eae eee same TF ogeneous Production function. This function has ae Prperty that if there is a change in all inputs bya Sage cctly in the same proportion. The scale enor gin is called the expansion path. Any line aaa will indicate the path of expansion or increase in nite proportion between the two factors. Here the the two inputs remain the same and the quantity anges as the scale changes. The output expands tion, The shape of the scale line depends upon roductive factors. The linear homogeneous hows that with constant returns to scale there vr which does not change, n0 mater This concept helps the ly once and the returns sm of variation of the changes ¢xa through ori through origin scale with defi proportions of ofinputs alone ch by the same propor the price of the pr production function sI will be one input proportio what the level of the firm's output. businessman to use optimum proportion onl will be constant. He will not have problem ofProduction Function & Laws of Production There are two different and diver opinions re concept, Some economists are of the view tl hat hat product constant returns to ‘¢¢ production are perfectly divisible. It is arg ale if f, reo preet the output blog dove eee ae conv el thee of the tne Ope of a Se Spe of worker, capital machine aw materi oa be producing: three times the output of a single’ mitt Robinson, FH Knight, .PLerner, Kaldor hold this view the possible if scales are changed the output will als; rere esd tontan eae Sam oe eerpes oe Gabi te proportion. Firstly, there are some fai must necessarily exhib Joan itis 10 change in the hese Economist, ary the factors in the sas tors whose amount canner is their supplies are scarce d, Secondly, there are some factors which are indivive and their full use can be had only if production is carried ons large scale. Because of these:two reasons the scales could not bo increased and the producer has to depend on factor proportionalis Scarcity of some fagtors and non-divisibility of some factors stazi in the way of increasing Scale ‘and to have optimum factor Proportionality. This means, if factors are perfectly divisible constant returns to scale will occur. This view has, been contended by Prof. E.H. Chamberlin. He says) even if the factors are perfectly divisible and could be varied in small quantities, constant returns to scale cannot prevail. He says that increasing returns to scale is more probable than constant returns because in increased scale and larger production (i) greater specialization of labour becomes possible, and (ii) introduction of ppecialized machinery and superior technology would be possible ing to Chamberlin increase in will lead to greater efficiency 0 increasing returns to scale The linear homogeneous ps case of constant returns to sca If there are two roduction function representing the He can be expressed mathematically. and y, then homogeneous production is: p stands for t fe jquation mes eM, the total t Rimes Oe (ot pg eee elds con: debe ction functi osuerion funct bie empirical ny used in prod is 855 exten ae inpies that in seculture and fad homogenco oxnany manufa increasing Retu We have alr in more than pr if all inputs : 50 per cent fieatoe, Alr and productio and the speci ecGnomies wil can be illustr ,theory the Set Ory the analysis, CMCEpy di ing this function factors Sof if, for regs same ingle mill? Joat is view that it ig so change in the hese Economists tors in the same amount cannot plies are scarce h are indivisible is carried on a es could not be ‘proportionality ¢ factors stand ptimum factor ectly divisible, hamberlin. He ould be varied ot prevail. He than constant ion (i) greater troduction of d be possible in increase in ter efficiency ms to scale. esenting the thematically. "production Man, Nanageriay i for the total em “pp stands for AI Droducigg @2Y) ee, ge fuation means thay ie ('etion ang = Mies eof the Tact thay hy A89 inet Y wee teemiyields Constant retueny "OB*RCOUs fos CY m time ased de yeti” TOR, Wace oPUlatly yo Linear hoe the Fen piycion function, because i @,Ktown a, ogee empirical studies withoyt mn 0e easily (eebehaveg Baby used! inal by ications ang BH is extensively employed SO™PUters, GaO™ and jg DS putput analysis. Tt hag linear raphy SS29UR of itPiies that in. India constant rect out by wie. and sean in USA ane Btn tat emi sg eteencous prod nee Grn aad fy manufacturing industries, © Rrst degree prevail B cessing Returns to Scale Haye have already stated that when the ee more than proportionate output, it is increasing retug fal iputs are increased by 20 per cent, anderen) Mating. Already we have stated that as the scales are mene tii production is expanded, certain economies become gece ‘ad the specialization of labour, superior machinery and otheg Hnomies will lead to greater output. Increasing returns to scale fan be illustrated as in Figure 7.7 y ale results MS to scale | Figure 7.7 P at 100 400 300 200 100 units FACTOR 'Y' (CAPITAL)with ewo factors, one ; 7 Fa igus jac ortional Sts Miigen ne wee nereased fy a) Bae at om 100 t0 200 units. Wh ing through origin on the 12, "*8 the i is drawn passi he lsocpe aes when the ees at increaeg t cale line OP represents §:°°tDat Mane ion betes cet proportion between x factor a nd eS pu emains const Re ror erases fron scale smaller than 4 to B, the ret * which is small from B to ¢ pee 200 to 300. The incr 200 to at the output is larger. The distance betyy, “than A and B; the distance between C a5 >; the distance between E and F ; han B and C; the E ony, AE, This pros shortening distance bety ar peoducteures implies that to have an increase of 199 equal Bede the firm needs to devote lesser and lesser of inp On Prope output increases more than proportionately am increase in input, The figure indicates that the increasing retut, to scale is in operation. ‘Stace is small ag wat © gp return inc from up the'scale C is smaller veen the Prof, Baumol! explains increasing returns to scale throug dimensional relations. For instance, to construct a wooden bor 1 foot-cube, 6 sq. feet of plank is required; to construct a wooden box of 3 foot-cube 54 sq, feet of plank is required. The input t produce 3 foot-cube box is 9 times larger than the input o foot-cube. But the capacity of 3 foot-cube box is 27 times greater than that of 1 foot-cube box:So also, ihe case with the construction of godowns, Double the number of bricks and other inputs will lead to f1 crease in ste ge capacity more than double Decreasing Returns to Scale When output increases in a smaller proportion than the increase in all inputs (Seale), decreasing returns to scale is said to be ia Operation; When the firm is expanding by increasing the scale, initially it may get inereasing return due to certain advantages of Seale and Geonomies, But eventually, diminishing returns will otut turns may be shown in the equal product y and drawing the scale line passing in the Figure 7.8. id Operation Analysis’, 3rd Edn. p. 382 showities in order wee cost of produc the ic is in operatio som product curves g s to scale. qu 150" return: “ | f | ° | The larg | curves indice | scale. There ar returns. Wh how is it th case of va constant w But here a in the samrcionenaie ne scale is in he return ines ) is small as we as wi nce between B a ween C nf cveen © and id and F is smaties stance between the crease of 100 eaae eee ae ees than the creasing returns to scale through - a wooden box of onstruct a wooden ed. The input to n the input of 1 s 27 times greater h the construction other inputs will than the increase is said to be in easing the scale, in advantages of eturns will oceur he equal product Ra Fi ree AS ne AB; BC; ageris owing at the scale has to ( €D; De. ial Economics gomities in order to get the © incre and EF qattighe returns are not Pranttte increase oe cost of production is increasing oe in output vi Be oem jn operation. Teasing as the deg ee OE Tee srs niall sng te Giinhing rte [oP to scale te the operant eps between succesive atoms 10 s m of the law of diminishing inishing Fi y igure 7.8 FACTOR Y (Capital) © FACTOR X (Labour) The larger and larger gaps between s carves indicate the operation of the la of diminishing scale. There are dil returns. When all the inputs ‘ how is it that the ‘output is not increasing tase of variable proportions 3 least one ft constant which ma} e ation for di ie u returns do net But here all inputs are fering opinions regarding the Cause of diminishing sr ereased in the given PrOROrOn proportionately: In the factor has been kept sminishing returns increase increased, but thMiva signiieance of Necessaries, Comforts ang yg ope lasifcaion of goots and stvices into necegan tts fe only relative in their concept, They are ny om Joxury for a villag he ing Yh nis social status, his tastes and preferences, moma persons, h i In spite ofthe relative nature of these Concepts, the Finance make use of this classification for taxation purposes, tia CONCEPT OF UTILITY re learning the principles and laws of economics related y oe ein oan wars, we Sead undead eee : In the ordinary language ‘Uuility” means “Usefulness. In economia 1 denotes the capacity of a commodity to satisfy human want. Goose services have power to satisly wants. For example, water has the pox Bey eu istics ue oa cor nea possess uly. The utility is not confined to material things alone, Ney Eee aesthetic ers ccs aa Baap eshte iacioaaaireime tires ws Ulity is the want satisfying power of a thing. The term is not related Hee ee Vee gear ene Smee Bae eaves acitaenagie win ae ey Uiility is a subjective concept. It depends on the mind of the con sumer. It cannot be measured in quantities, The same commodity or ser vice will have different utility for different people. For a non-smoker, ci- garette has no utility. For a vegetarian, mutton has no utility, Warm Clothing has little utility for the people in hot countries. So, utility de- pends on the consumer, and his need for the commodity e When the consumes consumes the commodity, he gets satisfact Rather, the commodity having uility gives the consumes the eee Then, what is the difference between the ‘utility’ of a commodity and the satisfaction’ ofthat commodity 19a consumer. Ulty & ay see pated satisfaction by the consumer, and ihe sausfaction en tual satisction derived. Though we cannot measure alliye ae jo psychological feeling, in ceonomics, we use "money" as tre get 8 @ fod of uly. Usility is measured i terms of price the sn SSUEiNE willing to pay for a commodity. Suppose A pays Rs. 50 fore MMer is erives rupees fifty worth of uty for it, Uy is estimarcy 3°82 be ‘money. This does not mean that utility relates only to.0 ‘ie., goods purchased by paying a price, Even non-ecogs oo n nomi hhave utility. The sunshine and a Me Et enya SOs te. ities. mmodity havi coats hav produces sons af pananas mi these are ail. Thus, Pee R ry te a nesein ae, aie a a iene and) PET Ong le create a corer iene fra bushcames aa in modem ing ll ono a loxury fora student. What is necessary for a man in toy®tkng) commodities nS Cone vere otek These classifications depend on 4 i ortind eset ace wl vane. carpenter makes a table out of the ‘The caer os, The carpener chang ne ing utility. This is called form remotes are ede oly a eg nly dug, ok ire ake ees a eae ules Tass som arcing goods from oe ple carrying SFave wility im the 2 te towne rough reed by ag Yo lace of sary. er eyo an merchants aes By ce of ey pee ya Moxie activi Uetity aad Demand rodeo connec ee gorcase foe pe come euch ofthe commas Ee Jo many factors. To demand fr on same. How mock af il he sty the es HEN comme commosiy and whe es be wy or ssn Resa anor ‘The conser savin ity; (bp) the price of the c« the consumer LAW OF DIMINIS! we studied about the con ality to satisfy 8 human want fy a human want, ‘ifficult to measure t is xe cms oF ONE. ro sy BS. 5 ity we ee sree ytihe ull We onied an imaginary Mel adored i he commitNCEPT OF UTILITY pends ono Gepends onthe mind of The sa 2 Beil net coun lt. Warm I theconmoay 8: lity de Be Bs sais UNE the satis aconmoaiy a ities and sevice, The cretion of ality is done by nee ingly th ullities canbe termed (a) Form utility @) sipenter makes a table out ofthe wood. As apiece tas ro ull for us, The carpenter changes its form and m as having uty, This i called form wtlity ‘Some commodities are needed only at certain times, Col dis, rin coois have utilities only during hot and rainy seasons respective igcers and suppliers make these available during the appropriate see sods from one place to ancther place, utility i created eae elit i the grove far aay fom ihe own, I these are brought to the town-market, the banenas wil be demanded by I Thus, uly is created by transporting the commodities fom the place of plenty to place of scarcity. This is called place utility. Tim tas wilt atthe timber depots and not atthe forest. Utility creaes em: ployment to many merchants, traders and producers. ten Utility and Demand Im order to consume a commodity the consumer has to demand the commodity, purchase it for a price and then consume ito get satisfac tion, How much of th mn nde ‘$0 many factors. To demand a commodity, it should have utility for the consumer. How much of utlity does the consumer get from the commodity isthe First question to be determined. Secondly, what isthe + paid by the consumer is ty oF satisfaction derived from the commodity. Tied what i the amount of resource (money) atthe disposal ofthe consumer. the money at the disposal of +s behaviour depends on : (a) the uly of ty; (b) the price of the commodity: and the consumer. LAW OF DIMINISHING MARGINAL UTILITY yas the power of a com WE studied about the concept of lity 10 Saisfy a human want. This concept is a psychotogi is very difficult to measure the utility. But the utlity can be msasured roughiy in terms of money, we are prepared to pay to getit. If we are pe pared to pay Rs.5 for commodity A and Rs, 10 for commodity 8, iis patthe wility we get fo jawever, old economists