Chapter IV

Analysis of Supply Curve

 Analysis of Supply Curve
 Supply analysis is related to the behaviour of the
producer – supply of a commodity influenced by
price of commodity.
 In the ordinary language supply mean the
amount of good offered for sale per unit of time.
 In economics, 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 producer,by retailers and whole sales.
 Supply Function

Sx = f (Px, Pf, Py, T, tm, t, …)

Sx = the supply of commodity X
Px = the price of X
Pf = the set prices of the factor inputs
employed for producing X.
Py = price of other good
T = technology used,
tm = time period
t = tax
 The Law of Supply
 Supply is the function of price
 The law of supply states that “other things
remaining the same, as the price of a commodity
rises, its supply is extended and as the price
falls, its supply is contracted.
 The quantity offered for sale directly varies with
price – higher the price, larger is the supply and
vice-versa.
 Supply schedule represents the relations
between prices and the quantities that the
producers are willing to manufacture and sell.
Assumptions of the Law of the Supply
 Constancy in …
 Price of related goods
 Cost of production
 Price of Factors of production
 Producers objective & state of technology
 No expectation of future change in price
 The number of firms in the market remains the
same.
 Climatic conditions, taste and preferences of
consumers remains constant.
 Supply schedule represents the relation
between prices and the quantities that the
producers are willing to manufacture and sell.
 Supply Schedule of firms A, B and C
Commodity is identical Aggregate of
Price ( in A, B, and C
A Firm B Firm C Firm
Rs.)

2 000 000 000 000

4 300 400 50 750

6 400 450 150 100

8 500 500 300 1300

10 600 550 400 1550

12 700 600 500 1800

14 900 800 750 2450

 Supply Curve

Supply

P2

Price P1

0 Q1 Q2 Quantity
The causes for upward sloping supply curve

1. An increase in price implies higher profits

leading to producers to produce more and
offer increasing quantities for sale.
2. This may cause incentive to new producers
entering into the industry and setting up
firms and produce more.
3. Positive
 Feature of the Law of Supply

1. There is a direct relationship between quantity

supplied and price.
2. There are two variables – price and supply –
supply is the dependent variable and price is
an independent variable.
3. This law is not universal in nature – it is based
on certain assumptions – other things
remaining constant.
4. Supply curve usually slopes upward from left
to right.
 Factors affecting supply

Prices of related Price Time

commodities

Factors Determining
Cost of Supply
Production Technology

Natural
Govt Policy & Future
Factors
Action Expectations
Factors affecting supply…..

1. Price of the commodity

 Higher the price of a commodity larger will
be the quantity supply and vice – versa.
 Higher prices always brings profit to
producers.
 Factors affecting supply…..

2. Prices of related commodities

 A change in the price of another commodity also
affects the supply of a commodity.
 For instance, if the price of good A rises, the
producer of good B may produce less of good B
and switch over to the production of good A in
order to sell more to make an profit.
 Factors affecting supply…..

3. Prices of factors of production

 If price of factors of production increases – (labour
and capital) – cost of production increases and
output will decline.
 The reverse will happen in the case of a fall in the
price of a factor.
4. Goal of Producers
 If a producer aims at maximising profit, he will
produces less of commodity and will involve large
risks.
 A producer who aims at maximizing his sales will
produce and sell more.
 Factors affecting supply…..

5. State of Technology
 If new and improved methods of production are
used – they tend to increase the supply of
commodities.
6. Number of firms and sellers existence
 Supply in a market depends on the no. of
firms/sellers producing and selling in the market.
 When producer/sellers are few – supply will be
small and vice – versa.
 Factors affecting supply…..

7. Cost of Production
 Wages, rate of interest, price of machinery and
equipment, raw-material etc influences on cost of
production.
8. Future Expectation
 Seller sells the commodity or supplies on the basis of the
prevailing prices.
 If he feels that future prices will be higher, he will reduce
the present supply of the product.
 If he feels that future prices may fall he will be tempted to
sell more at the current prices.
Factors affecting supply…..
9. Natural factors
 It is assumed that there is no change in natural factors
such as rain, drought etc – Agro Industries.
 Monsoon failure may result in the reducing of power
generation and eventually lead to curtailment of
production.
10. Change in Government Policy
 A fresh tax or levy of excise duties on commodity will
affect the price of the commodity and as a result the
supply will get affected.
 An increase in tax will reduce the supply and granting of
subsidy and incentive will increase the supply.
 Elasticity of Supply

 Supply change due to change in price

 The extent of change in supply in accordance
with the change in price is called elasticity of
supply.
 When, with a little change in price (rise/fall) there
is a considerable change in supply (rise/fall).
 The elasticity of supply is the degree of
responsiveness of a change in supply to a
change in price on the part of sellers.
Elasticity of Supply
Es = Percentage Change in Quantity Supply
Percentage Change in Price

Change in Quantity Supply price

= ÷
Change in Price Quantity supplied

∆Qs P
= *
∆P Qs
Where

∆Qs = Change in Quantity Supply

∆P = Change in Price
Types of Elasticity of Supply

1. Perfectly elastic supply

2. Perfectly inelastic supply
3. Unitary elastic supply
4. Relatively more elastic supply
5. Relatively less elastic supply
 1. Perfectly elastic supply
When an infinitely small change in price lead to an infinitely large change in the
quantity supplied.
Price

Perfectly elastic
supply curve

0
Quantity supplied
 2. Perfectly Inelastic Demand Curve
When a change in price causes no change in supply whatsoever.

Perfectly inelastic
supply curve
Price

0
Quantity supplied
 3. Unitary elastic supply curve
When the change in the amount supplied is in exact proportion to the change
in price
4. Relatively more elastic supply

When a given in change in price causes a more than proportionate change in the
amount supplied.
S

P1

Price

M M1
Quantity Supplies
5. Relatively less elastic supply
When a given change in price leads to a less than proportionate change in the
amount supplied.
S
Y

P1
Price

O M1 M X
Quantity of supplies
Consumer Surplus
Consumer surplus is the difference between the
maximum amount that a consumer is willing to
pay for a good and the amount actually paid.

The gap between total utility of a good and its

total market value is called consumer surplus.
Marshallian Approach
Explains consumer surplus with the help of demand curve

y
d

k
p
price r
p1

0 q q1 x

Quantity demanded