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Supply

By: Dr. Parul Agarwal

supply
Quantity of commodity sellers would offer at various prices.
The Marketing Supply Curve For World Marketing 1994
S 1.20 Price ($/)

1.10

1.00
S

0
9.5 11 12.5

Quantity Millions of MT

Reserve Price
Seller Refuses To Sell FACTORSType of good/perish ability of good. For not perishable goods, reserve price depends on future price. Future cost/price. Sellers liquidity.

Factors determining supply


Price Price of related goods Production Technology Production Cost Objective/Goal of firm Number of producers Future price expectations Taxes & subsidies, policies of Govt. Means of Transportation, communication, banking & insurance.

S
Price Quantity

--- Decrease --- Increase

Demand and total revenue


Total Revenue TR = P.Q Where, P - Price & Q Quantity Sold
D TR Curve P2

B E=1
P1 P3

TR

Price

0
Q2 Q1 Q3

D1

Q1

Quantity

Quantity

Marginal revenue
Change in total revenue resulting from selling an additional unit of the commodity. MR = Pn + 1 - (Pn - P n + 1 ) Qn
D

A C B

D
Q MR
PRICE

Graphical Presentation of MR curve Take pt. C as mid pt. of PA. Draw a line DCBG, then, PDC = CAB Thus PAQO = ODBQ Therefore, TR at price P is sum of MRS of all individual units. Hence MR curve is the line DCBG & it cuts any such perpendicular at its midpoint.

Mathematical derivation of MR
MR = d (TR) = d ( P.Q ) dQ dQ = P + Q dp --(i) dQ If demand curve is linear, then: Q = a bP Or P = a Q = a0 a1.Q --(ii) b b TR = P.Q = a0.Q a1.Q2 (substituting eqn. (ii) Then, MR = d(TR) = a0 2a1.Q dQ

Relationship e, Price Change & TR Change


Elasticity Co-efficient e=0 e<1 e=1 e>1 Change in Price , , , , Change in TR , , No Change ,

Relationship between Mr & e


Since, TR = P.Q MR = d (TR) = d (P.Q) dQ dQ =P + Q. dP --(i) dQ The price elasticity of demand is defined As e = -dQ . P dP Q Then, dQ = -e Q dP P Or = -1 P ---(ii) eQ

On substitution in Eqn. (i) MR = P + Q (-1 . P ) e Q = P P = P (1 1) e e MR = P ( 1 1 ) e MR = AR ( 1 1 ) (As P = AR) e 1 = - MR + 1 = -MR + AR e AR AR e = AR AR - MR

Applied problem
Assume that the Indian jute industry is at present in a equilibrium state with the producers supplying jute bags only to the domestic market at a prevailing markets prices. Apart from domestic suppliers. Indian jute industry faces competition from Bangladesh. Poor Domestic Demand Increased competition from Bangladesh. Cement industry, which is one of the largest users of jute bags, exempted from mandatory jute packaging. Farmers, instead of producing jute, use their farm lands for some other purposes.

Q. Assume that the free market price of rice is Rs. 10 per Kg. If a Govt. decides to peg its price at Rs.2 per Kg. Describe the likely economic impact with diagram.

Thanks..

By; Dr. Parul Agarwal