Principles of Economics (1) I.

Com Part I

CHAPTER # 4
Supply
Supply:
The quantity of a commodity which is offered for sale in a market at a certain price during a
given time period is called supply.

Stock:
The total quantity of a commodity available in the market or in the possession of the sellers at
some period of time is called stock.

Joint Supply:
The supply of such goods and services which are produced jointly is called joint supply i.e.
cotton and cotton seeds, mobile and charger etc.

Composite Supply:
If a commodity is obtained from different means then its total quantity obtained from all means
is called composite supply i.e. milk is obtained from buffalo, cow and goat etc.

Competing Supply:
There are some commodities whose supply competes with each other. It means if the supply of
a commodity is increased for one use, then its supply for some other use decreases i.e. wood,
electricity etc.

Market Period Supply:

Market period supply means the supply of gods is available for one day or for two days only i.e.
vegetables, fruits, meat etc.

Q. No.1
Define and explain Law of Supply with the help of schedule and
diagram. Also describe its assumptions and limitations.
Ans:
Introduction:
“The amount of goods and services produced are called production and the portion of
production offered for sale at certain price during a given time period is known as supply”.
Law of supply shows the positive relationship between quantity supplied of a commodity and
its price i.e. P↑ Qs ↑ and P↓ Qs ↓. Thus supply is the function of price i.e. Qs = f (P). The
standard form of law of supply is Qs = a + bP.

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Principles of Economics (2) I.Com Part I

Law of Supply:
According to John Taylor:
“Other things being equal, the higher the price, the higher the quantity supplied and the lower
the price, the lower the quantity supplied”.
According to S.E.Thomas:
“A rise in price tends to increase supply and fall in price tends to decrease supply”.
In simple words:
“Other things remaining the same, if the price of commodity increases its quantity supplied
expands and if price decreases its quantity supplied contracts”.
Quantity
Price
Schedule: Supplied
It is clear from the schedule that as the price of the commodity 2 200
increases, supply is extending. Price has risen from Rs.2 to Rs.4 per 3 300
kg and supply has extended from 200kg to 400kg. 4 400

Diagram:
Diagram shows that when price of a commodity is Rs.2 per kg, the
supply is 200kg as shown by the point A and when price of the
commodity rise to Rs.4 per kg, the supply is 400kg as shown by
point C. Supply curve is drawn by joining the points A, B and C.
Diagram shows that supply curve is positively sloped which means
increase in price results increase in supply and decrease in price
result decrease in supply.

Assumptions:
Law of supply holds under following assumptions.
1. Cost of Production:
It is assumed that cost of production remains constant. If the cost of production decreases, the
supply of the commodity increases at the same price. The law of supply will not hold true.
2. No Change in Technology:
The law of supply will hold if there is no change in technology because modern techniques of
production reduce the cost of production, as a result quantity supplied increase at the same
price.
3. Efficiency of Factors of Production:
It is assumed that efficiency of factors of production does not change. Increase in efficiency
means more production at low cost while decrease in efficiency means low production at high
cost.

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Principles of Economics (3) I.Com Part I

4. No New Discoveries and Innovations:

It is also assumed that there is no change in natural and productive resources because of new
discoveries and innovations. As new discoveries mean more supply at the same price or at low
price.
5. Price of Labor and Raw Material do not Change:
Change in labor price i.e. wages and raw material affects the cost of production and cost of
production affect the supply. So it is assumed that there is no change in price of labor and raw
material.
6. Natural Climate and War:
The supply is affected during floods storms, earth quacks, diseases and lowest attack on
agriculture crops and law of supply may not hold.
7. Weather Conditions and Seasons:
A change in weather or season may change the supply i.e. supply of wool and warm garments
increases in winter season and supply of cotton garments increases in summer season. So it is
assumed that there is no change in weather and seasons.

Exceptions or Limitations:
Following are the limitations of the law of supply.
1. Agricultural Output:
The supply of agricultural products depends more on natural climate and forces rather than on
price. In a particular season, the supply of an agricultural commodity may go down even when
its price has gone up.
2. Future Expectations:
If the producer expect that price of commodity may fall in future he would anxious to sell his
present stock even at lower price than the current price.
3. Leaving an Industry:
If the producer is leaving a particular industry he does not care to charge a price which covers
his cost of production. In such a case, the seller may ready to sell more at a low price.
4. Urgent Need of Cash:
If a seller is in an urgent need for cash, he will like to sell his stock even at low price.
5. Assumptions are Weak:
The assumption on which the law is based are weak and questionable e.g. technology does not
remain same, cost of production does not remain same as the prices of labor (wages), capital
(interest) and raw material does not remain same.

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Principles of Economics (4) I.Com Part I

Q. No.2
Explain the following Concepts with schedule and diagrams.
1. Movement along the Supply curve or Extension and Contraction in
Supply.
2. Shift in Supply curve or Rise and Fall of Supply.
Ans:
Introduction:
The Supply of a commodity may change due to many factors. For example
 Change in Price  Change in Weather
 Change in Cost of Production  Means of Transportation
 Change in Technology  Uncertain Conditions
A change in any factor can change the supply of a commodity. This change in supply can be
classified as:
1. Movement along the Supply Curve or Extension and Contraction in Supply:
If the change in supply is due to change in the price of that commodity, it is called extension or
contraction in supply.
When the price of a commodity increases, its quantity supplied also increase; it is called
extension in supply.
When the price of a commodity decreases, its quantity supplied also decreases; it is called
contraction in supply.
The movement of the supply is explained
with the help of schedule and diagram. Quantity
Price
Supplied
Schedule and diagram show that with 2 200
the increase in price, quantity supplied 3 300
extends and with the decrease in price, 4 400
quantity supplied contracts.

2. Shift in Supply Curve or Rise and Fall of Supply:

If the change in supply is not due to change in price, but due to change in some other factors
(like cost of production, technology, weather, transportation etc), it is called shift in supply or
rise and fall of supply.
When quantity supplied of a commodity decreases due to some other factors instead of price; it
is called Fall in supply. And when quantity supplied of a commodity increases due to some other
factors instead of price; it is called Rise in supply.

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Principles of Economics (5) I.Com Part I

Fall in Supply:
There are two types of fall in supply.
Price Supply
First Type:
3 8
When the price remains constant
3 6
and quantity supplied decreases
3 4
due to other factors, it is called
fall in supply. As shown by schedule and diagram.

Second Type:
When the price of the commodity Price Supply
increases but quantity supplied 2 6
remains constant, it is also called 3 6
fall in supply. As shown by 4 6
schedule and diagram.

Rise in Supply:
There are also two types of rise in supply.

First Type:
When the price remains constant Price Supply
and quantity supplied increases 3 4
due to other factors, it is called 3 6
rise in supply. As shown by 3 8
schedule and diagram.

Second Type:
When the price of the commodity Price Supply
decrease but quantity supplied 4 6
remains constant, it is called rise 3 6 in
supply. As shown by schedule and 2 6
diagram.

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Principles of Economics (6) I.Com Part I

Q. No.3
Define Elasticity of Supply. Also explain different methods to measure
it.
Ans:
Introduction:
There are many factors including price that disturb the supply. These factors change the supply
of anything. But we do not know that how much changes take place in quantity supplied when
price changes. For the sake of this purpose, we apply the concept of elasticity of supply.

Elasticity of Supply:
According to Marshall:
“Degree of responsiveness of quantity supplied to change in price is known as elasticity of
supply”.
In simple words:
Elasticity of supply is the ratio of percentage or proportionate change in quantity supplied due
to percentage or proportionate change in price.
Symbolically it is written as:
Proportionate Change in Quantity Supplied
Es =
Proportionate Change in Price
∆Q/Q ∆Q P
Es = = ×
∆P/P ∆P Q
Where ∆Q = Change in Quantity Supplied & ∆P = Change in Price

Measurement of Elasticity of Supply:

Economists have given following methods for measuring elasticity of supply.
1. Unity Method
2. Percentage Method

1. Unity Method:
In this method, we compare the changes in supply after the change in price.

1. Elasticity equal to unity (E = 1):

If the ratio of change in supply is equal to ratio of change in price,
elasticity of supply is equal to unity.

Price Supply
2 2
4 4
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2. Elasticity greater than unity (E >1):

If the ratio of change in supply is greater than ratio of
change in price, elasticity of supply is greater than unity.

Price Supply
2 2
4 8

3. Elasticity less than unity (E <1):

If the ratio of change in supply is less than ratio of change in
price, elasticity of supply is less than unity.

Price Supply
2 2
6 4

2. Percentage Method:
In this method, we compare percentages changes in quantity supplied and percentage change
in price.
Percentage Change in Quantity Supplied
Es =
Percentage Change in Price

If the percentage change in quantity supplied is equal to percentage change in price, elasticity
of supply is equal to unity. Such as
25%
Es = =1
25%

2. Elasticity greater than unity (E >1):

If the percentage change in quantity supplied is greater than percentage change in price,
elasticity of supply is greater than unity. Such as
30%
Es = >1
25%
3. Elasticity less than unity (E <1):
If the percentage change in quantity supplied is less than percentage change in price, elasticity
of supply is less than unity. Such as
20%
Es = <1
30%

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Principles of Economics (8) I.Com Part I

Some More Types of Elasticity of Supply

More Elastic Supply:
When a small change in price causes a big change in supply, it is called more elastic supply.
Less Elastic Supply:
When a big change in price causes a very small change in supply, it is called less elastic supply.
Infinite or Perfectly Elastic Supply:
When there is no change in price but quantity supplied increases infinitely, it is called infinite or
perfectly elastic supply. Here the supply curve is horizontal.
Zero or Perfectly Inelastic Supply:
When due to any change in price, supply remains unchanged; it is called zero or perfectly
inelastic supply. Here the supply curve is vertical.
Determinants of Elasticity of Supply:
Following are the main determinants of elasticity of supply.
 Cost of Production  Nature of the Product
 Nature of the Technology  Time Period
 Capital Requirement  Laws of Return
 Factors Mobility  Technological Changes

Short Questions
Q.No.1: What is meant by Supply?
Ans: The quantity of a commodity which is offered for sale in a market at a certain price during
a given time period is called supply.
Q.No.2: Differentiate between Supply and Stock.
Ans: The quantity of a commodity which is offered for sale in a market at a certain price during
a given time period is called supply.
The total quantity of a commodity available in the market or in the possession of the sellers at
some period of time is called stock.
Q.No.3: Define Joint Supply.
Ans: The supply of such goods and services which are produced jointly is called joint supply i.e.
cotton and cotton seeds, mobile and charger etc.
Q.No.4: Define Composite Supply.
Ans: If a commodity is obtained from different means then its total quantity obtained from all
means is called composite supply i.e. milk is obtained from buffalo, cow and goat etc.

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Principles of Economics (9) I.Com Part I

Q.No.5: What do you mean by Competing Supply?

Ans: There are some commodities whose supply competes with each other. It means if the
supply of a commodity is increased for one use, then its supply for some other use decreases
i.e. wood, electricity etc.

Q.No.6: Define Market Period Supply.

Ans: Market period supply means the supply of gods is available for one day or for two days
only i.e. vegetables, fruits, meat etc.

Q.No.7: Define Law of Supply.

Ans: Other things remaining the same, if the price of commodity increases its quantity supplied
expands and if price decreases its quantity supplied contracts.

Q.No.8: Write four assumptions of Law of Supply.

Ans: Followings are the assumptions of Law of Supply.
1. Cost of Production 3. Efficiency of Factors of Production
2. No change in Technology 4. No new Discoveries and Innovations

Q.No.9: Write four limitations of Law of Supply.

Ans: Followings are the Limitations of Law of Supply.
1. Agriculture Output 3. Leaving an Industry
2. Future Expectations 4. Urgent need of Cash

Q.No.10: Write four causes of change in Supply.

Ans: The supply of a commodity may change due to followings factors.
1. Change in Price 3. Change in Technology
2. Change in Cost of Production 4. Change in Weather

Q.No.11: Differentiate between Contraction and Extension of Supply.

Ans: When the price of a commodity increases, its quantity supplied also increase; it is called
extension in supply. And when the price of a commodity decreases, its quantity supplied also
decreases; it is called contraction in supply.

Q.No.12: Differentiate between Rise and Fall of Supply.

Ans: When quantity supplied of a commodity decreases due to some other factors instead of
price; it is called Fall in supply. And when quantity supplied of a commodity increases due to
some other factors instead of price; it is called Rise in supply.

Q.No.13: Define Elasticity of Supply.

Ans: Degree of responsiveness of quantity supplied to change in price is known as elasticity of
supply.

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Principles of Economics (10) I.Com Part I

Q.No.14: Write different methods to measure Elasticity of Supply.

Ans: followings are the methods to measure elasticity of supply.
1. Unity Method 2. Percentage Method
Q.No.15: Define Elasticity of Supply equal to unity.
Ans: If the ratio of change in supply is equal to ratio of change in price, elasticity of supply is
equal to unity.
Q.No.16: Define Elasticity of Supply less than unity.
Ans: If the ratio of change in supply is less than ratio of change in price, elasticity of supply is
less than unity.
Q.No.17: Define Elasticity of Supply greater than unity.
Ans: If the ratio of change in supply is greater than ratio of change in price, elasticity of supply is
greater than unity.
Q.No.18: What do you mean by More Elastic Supply?
Ans: When a small change in price causes a big change in supply, it is called more elastic supply.
Q.No.19: What do you mean by Less Elastic Supply?
Ans: When a big change in price causes a very small change in supply, it is called less elastic
supply.
Q.No.20: What do you mean by Infinite Elastic Supply?
Ans: When there is no change in price but quantity supplied increases infinitely, it is called
infinite or perfectly elastic supply. Here the supply curve is horizontal.
Q.No.21: What do you mean by Zero Elastic Supply?
Ans: When due to any change in price, supply remains unchanged; it is called zero or perfectly
inelastic supply. Here the supply curve is vertical.
Q.No.22: Write four determinants of Elasticity of Supply.
Ans: Followings are the main determinants of Elasticity of Supply.
1. Cost of Production 3. Nature of the Technology
2. Nature of the Product 4. Time Period

Multiple Choice Questions

Four possible answers are given for the following questions. Choose the correct answer.
1. The quantity of a commodity which is offered for sale in a market at a certain price during a
given time period is called
a. Demand c. Stock
b. Supply d. None of them
2. Stock means the quantity
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Principles of Economics (11) I.Com Part I

a. Sold in the market c. Which exist in warehouse

b. Offered for sale in market d. Total production
3. Which combination of the following is of joint Supply
a. Tea and Coffee c. Mobile and Charger
b. Pepsi and Coke d. Wheat and Rice
4. If supply of a commodity is fixed, it is called
a. Market period supply c. Long period supply
b. Short period supply d. None of them
5. Price and Supply has a relationship
a. Positive c. decreasing
b. Negative d. None of them
6. In functional equation of Law of Supply “Qs = a + bP”, Q & P are
a. Constants c. Variables
b. Parameters d. Identities
7. In functional equation of Law of Supply “Qs = a + bP”, a & b are
a. Constants c. Variables
b. Parameters d. Identities
8. According to Law of Supply when price of a commodity increases, then supply
a. Decreases c. Contracts
b. Increases d. Extends
9. Slope of supply curve is
a. Positive c. Horizontal
b. Negative d. Vertical
10. Decrease in supply due to decrease in price is called
a. Extension of supply c. Rise of supply
b. Contraction of supply d. Fall of supply
11. Increase in supply due to increase in price is called
a. Extension of supply c. Rise of supply
b. Contraction of supply d. Fall of supply
12. When supply increase due to other factors instead of price, it is called
a. Extension of supply c. Rise of supply
b. Contraction of supply d. Fall of supply
13. When supply decrease due to other factors instead of price, it is called
a. Extension of supply c. Rise of supply
b. Contraction of supply d. Fall of supply

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Principles of Economics (12) I.Com Part I

14. When price of a good increases but its supply remains constant, it is called
a. Extension of supply c. Rise of supply
b. Contraction of supply d. Fall of supply
15. When price of a good decrease but its supply remains constant, it is called
a. Extension of supply c. Rise of supply
b. Contraction of supply d. Fall of supply
16. Movement on the same supply curve is called
a. Extension and Contraction c. Decrease in supply
b. Increase in supply d. Rise and fall in supply
17. In case of rise in supply, supply curve shifts
a. Left side c. Downward
b. Right side d. Both b & c
18. In case of fall in supply, supply curve shifts
a. Left side c. Right side
b. Upward d. Both a & b
19. Elasticity of supply is the name of
a. Change in supply c. Change in income
b. Change in price d. Change in taste
20. The ratio of change in quantity supplied due to change in price is called
a. Law of Supply c. Income Elasticity
b. Elasticity of Supply d. Cross Elasticity
21. Unity method to measure elasticity of supply was presented by
a. Adam Smith c. Robbins
b. Marshall d. Keynes
22. If the ratio of change in supply is equal to ratio of change in price, elasticity of supply will be
a. Equal to unity c. Less than unity
b. More than unity d. Zero Elasticity
23. If the ratio of change in supply is greater than the ratio of change in price, elasticity of
supply will be
a. Equal to unity c. Less than unity
b. More than unity d. Zero Elasticity
24. If the ratio of change in supply is less than the ratio of change in price, elasticity of supply
will be
a. Equal to unity c. Less than unity
b. More than unity d. Zero Elasticity
25. If supply is not influenced by the change in price, elasticity of supply will be
a. More than unity c. Zero Elasticity
b. Less than unity d. Infinite Elasticity

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Principles of Economics (13) I.Com Part I

26. When there is no change in price but quantity supplied increases infinitely, it is called
a. More than unity c. Zero Elasticity
b. Less than unity d. Infinite Elasticity

27. Elasticity of supply for perishable goods is

a. More elastic c. Equal to unity
b. Less elastic d. Equal to zero
28. Elasticity of supply for durable goods is
a. Elastic c. Perfectly inelastic
b. Perfectly elastic d. None of these
29. Perfectly inelastic supply curve is
a. Vertical c. Rise upward
b. Horizontal d. Fall downward
30. Perfectly elastic supply curve is
a. Vertical c. Rise upward
b. Horizontal d. Fall downward

Answers to Multiple Choice Questions:

1 Supply 9 Positive 17 Both b & c 25 Zero elasticity
Which exist in Contraction in Infinite
2 10 18 Both a & b 26
warehouse supply elasticity
Mobile and Extension in Change in
3 11 19 27 Equal to zero
Charger supply supply
Market period Elasticity of
4 12 Rise of supply 20 28 Elastic
supply supply
5 Positive 13 Fall of supply 21 Marshall 29 Vertical
6 Variables 14 Rise of supply 22 Equal to unity 30 Horizontal
7 Constants 15 Fall of supply 23 More than unity
Extension and
8 Extends 16 24 Less than unity
contraction

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Principles of Economics (14) I.Com Part I

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