Theory of Supply & Price Elasticity

Solution

01. (a) Horizontal summation

02. (a) For industry as a whole
03. (c) Positive
04. (a) Starting from y axis
05. (c) Supply schedule, quantity supplied
Explanation: Supply schedule, quantity supplied
To practice more questions & prepare well for exams, download myCBSEguide App.
06. (b) Leftward shift in supply curve
Explanation: If there is an increase in the price of factors of production the cost of
production rises. The consequent increase in the firm’s average cost at any level of
output is usually accompanied by an increase in the firm’s marginal cost at any level
of output. This means that the firm’s supply curve shifts to the left: at any given
market price, the firm now supplies fewer units of output.
07. (c) a decrease in quantity supplied today
Explanation: If a producer is expecting a price rise in the near future, he will be
willing to do less supply at the existing price.
08. (c) direct
Explanation: Law of supply shows direct relation between price and supply.
09. (a) (+)1.2
Explanation: Elasticity of supply = %age change in quantity supplied/%age change in
price change
= 60%/50% = 1.2
(+)1.2
10. (d) all of these
Explanation: Increase in supply refers to a situation when more is supplied at the
existing price of the commodity. It leads to a forward shift in the supply curve.
Increase in supply may occur due to improvement in technology, reduction in factor
prices, a decrease in the price of a competing product etc.
11. (b) Both A and R are true but R is not the correct explanation of A.
Explanation: Both A and R are true but R is not the correct explanation of A.
12. State True or False:

False
Explanation: False. When a straight line upward-sloping supply curve shoots
from the X-axis, the elasticity of supply (Es) < 1.

False
Explanation: Movement on the same supply curve is possible when there is a
change in the price of the commodity itself. If the price of factor inputs rises,
supply decreases and the supply curve will shift to the left.
13. Fill in the blanks:

Elastic

more

14. When the number of firms increases, the supply curve shifts to the right. As now
more goods can be supplied because number of firms has been increased.
15. Increase in input price.
16. The quantity supplied of the given commodity depends not only on its price, but
also on the prices of other goods. ‘Increase’ and ‘Decrease’ in prices of other goods
shifts the original supply curve of given commodity.
(i) Increase in Price of other goods:
When price of other goods rises, then production of such other goods become more
profitable in comparison to the given commodity.
(ii) Decrease in Price of other goods:
Fall in price of other goods make production of the given commodity more
profitable and it increases its supply.
17. Market Supply refers to quantity of a commodity that all the firms are willing and
able to offer for sale at a given price during a given period of time. It is obtained by
adding all the individual supplies at each and every level of price. Market supply
schedule is expressed as

Where

is the market supply and are the individual supply of

supplier a, b and so on.

18. In the long run, as there is no fixed cost, the perfectly competitive firm's supply
curve will be the summation of the upward sloping portion of SMC above the
minimum point of LAC (when price ≥ minimum LAC), and the vertical portion of the
price axis (when price < minimum of LAC). The long-run supply curve of a perfectly
competitive firm is derived in two stages.

When the price is equal to the minimum of LAC: Let us suppose that the firm
is facing a market price OP that exceeds the minimum of LAC. MC is equal
to MR (at point E) and MC is positively sloped at this point of intersection.
Also, the price is greater than the minimum of LAC. In the long run, the firm
produces only at minimum average cost. In this situation, long-run marginal
cost, marginal revenue, average revenue and long-run average cost are
equal i.e., LMCMR (= AR)LAC (minimum). Thus, the firm is at long-run
equilibrium, facing the price OP and producing Oq1 units of output. The
supply curve is 'SS', represented by the upward portion of LMC above the
 minimum of LAC.

When the price is less than the minimum of LAC: Let us suppose that the
market price faced by a firm is OP1, which is less than the minimum of LAC.
At this price, the firm would not produce any output because producing any
output will lead the firm to incur losses. Therefore, the firm would not
produce anything. So, the supply curve of the firm in the long run for the
price less than the minimum of LAC is given by S1S1 and is represented by
the darkened vertical part of the price axis.

Combining 1st and 2nd stages, the firm's long-run supply curve under
perfect competition is given by (S1S1 + SS).

19 (i) Subsidy on production If the government gives subsidy on the production of

particular commodity, the producer will earn higher revenues due to fall in cost, price
remaining constant. This results in higher profits. In this situation, the supply of the
particular commodity increases. when subsidy on particular good decrease supply of that
commodity decreases.

(ii)Change in prices of other goods As resources have alternative uses, the quantity
supplied of a commodity depends not only on its price but also on the price of other
commodities. Increase in the price of other goods makes them more profitable in
comparison to the given commodity.
As a result, the firm shifts its limited resources from production of the given
commodity to production of other goods, as a result, the supply of concerned
commodity falls.

20 (i) Change in technology Technological improvement tends to lower the Marginal Cost
and Average Cost of production. because better technology facilitates higher output with
the same inputs and as a result profit of producer increases. Accordingly, producers are
willing to supply more at the existing price and supply curve will shift to the right from SS
to S1S1 and quantity supplied increases from OQ to OQ1, at the same level of price.

(ii)Change in input price In case of an increase in input price, Marginal Cost tends to rise.
This will reduce the profits of the producers. Accordingly, producers will supply less of the
commodity at its existing price. This implies a backward shift in the supply curve, from SS
to S1S1, or decrease in supply.
However, if input prices fall, Marginal Cost will also fall This will increase the profits of the
producers. Accordingly, producers will supply more of the commodity at the existing price.
This implies a forward shift in the supply curve, from SS to S2S2.

(iii)Change in tax rate Increase in taxes by the government will also increase the cost of
production due to which profit decreases. In this situation, the supplier will reduce supply.