Downloaded 1,368 times
Uploaded byShompa Nandi
Law of supply
The document discusses the law of supply, defining it as the relationship between the quantity of a commodity that producers are willing to sell and its price over time, emphasizing that higher prices typically lead to higher quantities supplied. It explains both individual and market supply schedules and curves, as well as factors influencing supply, including the prices of factors of production, technology, and government policies. Additionally, it explores the concepts of elasticity of supply, defining various types and methods for measuring it, along with factors affecting elasticity.
More Related Content
Law of supply
- 1. Law of Supply Prof.Shampa Nandi
- 2. What is supply? ‘Supplyrefers to the quantity of a commodity which producers or sellers are willing to produce and offer for sale at a particular price’, in a given market, at a particular period of time
- 3. The three importantaspects of supply are…. • Supply is a desired quantity • Supply is always explained with reference to price • Time during which it is offered for sale
- 4. Supply Schedule andSupply Curve Supply schedule shows a tabular representation of law of supply. It presents the different quantities of a product that a seller is willing to sell at different price levels of that product. The graphical representation of supply schedule is called supply curve. Supply Schedule and Supply Curve are of two types 1) Individual Supply Schedule & Individual Supply Curve 2) Market Supply Schedule & Market Supply Curve
- 5. Individual supply schedule& Individual Supply Curve Refers to a supply schedule that represents the different quantities of a product supplied by an individual seller at different prices. The supply curve is showing a straight line and an upward slope. This implies that the supply of a product increases with increase in the price of a product. Price of Milk (Per liter in Rs) Quantity Supplied (1000 per day in liters) 10 10 12 15 14 20 16 25
- 6. Market Supply schedule& Market Supply Curve Refers to a supply schedule that represents the different quantities of a product that all the suppliers in the market are willing to supply at different prices. Market supply curve also represents the direct relationship between the quantity supplied and price of a product. Price of Product X Individual Supply Market Supply A B C 100 750 500 450 1700 200 800 650 500 1950 300 900 750 650 2300 400 1000 900 700 2600
- 7. Supply Function orDeterminants of Supply Supply function studies the functional relationship between supply of a commodity and its various determinants. Sx = f ( PX, PR, NF, G, PF, T, EX, GP) Where, Sx = Supply of a Commodity PX = Price of the Commodity PR = Price of the Related Goods NF = Number of Firms G = Goal of the Firm PF = Price of factors of Production T = Technology EX = Expected Future Price GP = Government Policy
- 8. Price of theCommodity There is a direct relationship between price of a commodity and its quantity supplied. When price increases, supply also increases because it motivate the firm to supply more in order to get more profit. When price decreases, smaller quantity will be supplied as profit decreases.
- 9. Price of RelatedGoods Producers always have the tendency of shifting from the production of one commodity to another commodity. If the prices of another commodity increases, especially substitute goods, producers will find it more profitable to produce that commodity by reducing the production of the existing commodity. For Example: Suppose the seller of tea notice that the price of coffee increases . They may reduce the amount of resources devoted to the selling of tea in favour of coffee.
- 10. Number of Firms Marketsupply of a commodity depends upon number of firms in the market. Increase in the number of firms implies increase in the market supply, and decrease in the number of firms implies decrease in the market supply of a commodity.
- 11. Goal of theFirm If goal of the firm is to maximise profits, more quantity of the commodity will be offered at a higher price. On the other hand, if goal of the firm is to maximise sale more will be supplied even at the same price.
- 12. Price of theFactor of Production Supply of a commodity is also affected by the price of factors used for the production of the commodity. If the factor price decreases, cost of production also reduces. Accordingly, more of the commodity is supplied at its existing price. Conversely, if the factor price increases cost of production also increases. In such a situation less of the commodity is supplied at its existing price.
- 13. Change in Technology Changein technology also affects supply of the commodity. Improvement in the technique of production reduce cost of production. Consequently, more of the commodity is supplied at its existing price.
- 14. Expected Future Price Ifthe producer expects price of the commodity to rise in the near future, current supply of the commodity will reduce. If, on the other hand, fall in the price is expected, current supply will increase.
- 15. Government Policy ‘Taxation andSubsidy’ policy of the government affects market supply of the commodity. Increase in taxation tends to reduce supply. On the other hand, subsidies tend to increase supply of the commodity.
- 16.
- 17. THE LAW OFSUPPLY ‘Law of supply states that other things remaining the same, the quantity of any commodity that firms will produce and offer for sale rises with rise in price and falls with fall in price.’ i.e. Higher the price, higher will be quantity supplied and lower the price smaller will be quantity supplied. ‘Other things remaining the same’ means determinants other than own price such as technology, goals of the firm, government policy, price of related goods etc. should not change.
- 18. THE LAW OFSUPPLY SS Slopes upward from left to right. It shows positive relationship between price of the commodity and its quantity supplied. As price rises quantity supplied also rises. Price of Rice (Rs) Quantity Supplied (kg) 10 5 11 6 12 7 13 8 14 9 15 10 16 11
- 19. Assumptions of theLaw of Supply • There is no change in the prices of the factors of production. • There is no change in the technique of production. • There is no change in the goal of firm. • There is no change in the prices of related goods. • Producers do not expect change in the price of the commodity in the near future.
- 20. Exceptions to theLaw of Supply • The law of supply does not apply strictly to agricultural products whose supply is governed by natural factors. If due to natural calamities, there is fall in the production of wheat, then its supply will not increase, however high the price may be. • Supply of goods having social distinction will remain limited even if their price tends to rise. • Seller may be willing to sell more units of a perishable commodity at a lower price.
- 21. Why More ofa Good is Sold When its Price Increases? Or Why Does Demand Curve Slope Upwards?
- 22. Why Does DemandCurve Slope Upwards? • The level of price determines profit. i.e. higher the price, higher the profit and vice versa. So higher the price, the greater is the incentive for the producer to produce and supply more in the market, other things remain the same. • Positive slope of supply curve is also caused by the rise in the cost of production. Usually cost of production increases with increase in production. In this situation a producer will produce and sell more units only at a higher price. • The rise in price also motivates other producers to produce this commodity so as to earn higher profit.
- 23. Change in QuantitySupplied or Extension and Contraction of Supply or Movements Along the Supply Curve Increase in quantity supplied of a commodity due to rise in its price is called Extension of Supply and decrease in quantity supplied due to fall in its price is called Contraction of Supply.
- 24. Change in Supplyor Increase and Decrease in Supply or Shift in Supply Curve Increase in Supply occurs when more is supplied at the existing price, while decrease in supply occurs when less is supplied at the existing price. While increase in supply cause a forward shift in supply curve, decrease in supply cause a backward shift in supply curve.
- 25.
- 26. Elasticity of Supply Thelaw of supply indicates the direction of change—if price goes up, supply will increase. But how much supply will rise in response to an increase in price cannot be known from the law of supply. To quantify such change we require the concept of elasticity of supply that measures the extent of quantities supplied in response to a change in price.
- 27. Elasticity of Supply Elasticityof supply measures the degree of responsiveness of quantity supplied to a change in own price of the commodity. It is also defined as the percentage change in quantity supplied divided by percentage change in price. It can be calculated by using the following formula: ES = % change in quantity supplied/% change in price Symbolically, ES = ∆Q/Q ÷ ∆P/P = ∆Q/∆P × P/Q
- 28. Types of Elasticityof Supply Like elasticity of demand, there are five cases of ES: (a) Elastic Supply (ES>1): (b) Inelastic Supply (ES< 1): (c) Unit Elasticity of Supply (ES = 1): (d) Perfectly Elastic Supply (ES = ∞): (e) Perfectly Inelastic Supply (ES = 0):
- 29. Perfectly Elastic Supply(ES = ∞) The economic interpretation of this supply curve is that an unlimited quantity will be offered for sale at the price OP. If price slightly drops down below OP, nothing will be supplied. The supply curve PS1 drawn in Figure has an elasticity of supply equal to infinity. Here the supply curve has been drawn parallel to the horizontal axis.
- 30. Perfectly Inelastic Supply(ES = 0) This curve describes that whatever the price of the commodity, it may even be zero, quantity supplied remains unchanged at OQ. This sort of supply curve is conceived when we consider the supply curve of land from the viewpoint of a country, or the world as a whole.
- 31. Unitary Elasticity ofSupply (ES = 1) If price and quantity supplied change by the same magnitude, then we have unit elasticity of supply. Any straight line supply Curve passing through the origin, such as the one shown in Figure, has an elasticity of supply equal to 1. This can be verified in this way.
- 32. Relatively Elastic Supply(ES>1) Supply is said to be elastic when a given percentage change in price leads to a larger change in quantity supplied. Under this situation, the numerical value of Es will be greater than one but less than infinity. Here quantity supplied changes by a larger magnitude than does price.
- 33. Relatively Inelastic Supply(ES< 1) Supply is said to be inelastic when a given percentage change in price causes a smaller change in quantity supplied. Figure depicts inelastic supply curve where quantity supplied changes by a smaller percentage than does price.
- 34. Measurement of PriceElasticity of Supply
- 35. Measurement of PriceElasticity of Supply This concept is parallel to the concept of price elasticity of demand. It points out the reaction of the sellers to a particular change in the price of the commodity. It explains the quantitative changes in supply of a commodity, due to a given change in the price of the commodity. Methods for Measuring Price Elasticity of Supply: Price elasticity of supply can be measured by the following methods: 1. Percentage Method 2. Geometric method
- 36. 1. Percentage Method Likeelasticity of demand, the most common method for measuring price elasticity of supply (Es) is percentage method. This method is also known as ‘Proportionate Method’. According to this method, elasticity is measured as the ratio of percentage change in the quantity supplied to percentage change in the price.
- 37. 1. Percentage Method ForExample: A producer offers to sell 400 units of a commodity when its price is Rs. 10 per unit, while only 200 units are offered if the price reduces to Rs. 5 per unit. Find elasticity of supply. Solution: ES = Percentage Change in quantity supplied Percentage change in Price = 200 x 10 5 400 ES = 1
- 38. 2. Geometric Method Thismethod studies five different situations of `elasticity of supply as under: (i) Es = 1, unitary elasticity: when a straight line upward sloping supply curve starts from the point of origin. in this case percentage change in quantity supplied is equal to the percentage change in price
- 39. (ii) Es >1, or Greater unitary Elasticity: When a straight line upward sloping supply curve starts from the percentage change in price . than Y-axis. In this case , percentage change in quantity supplied is greater than percentage change in price.
- 40. (iii)Es<1, or Lessthat Unitary Elasticity: When a straight line upward sloping curve starts form the X-axis. In this case , percentage change in quantity supplied is less than percentage change in price.
- 41. (iv) Es =0 , or Perfectly Inelastic Supply: It refers to a situation in which there is no change in supply remains unchanged it is a situation in which price has no influence on supply. In this case, supply curve is a vertical straight line as given fig.
- 42. (V) Es =or perfectly elastic supply : It refers to a situation in which supply is infinite corresponding to a particular price of the commodity . Accordingly, a slightest fall in price causes an infinite change in supply , reducing it to zero . In this case , supply curve is a horizontal straight line .
- 43. Factors Affecting Elasticityof Supply 1) Nature of the Inputs Used: If factors of production are those which are commonly used (and therefore easily available), supply of the commodity will be elastic. On the other hand, if specialised factors are used (which are not easily available), supply will be less elastic. 2) Natural Constraints: The elasticity of supply is also influenced by the natural constraints in the production of a commodity. If we wish to produce more teak wood, it will take years of plantation before it becomes usable. Supply of teak wood will therefore be less elastic.
- 44. Factors Affecting Elasticityof Supply 3) Risk Taking: The elasticity of supply depends on the willingness of entrepreneurs to take risk. If entrepreneurs are willing to take risk, the supply will be more elastic. On the other hand, if entrepreneurs hesitate to take risk, the supply will be inelastic. 4) Nature of the commodity: Perishable goods are relatively less elastic in supply than durable goods, because it is difficult to store the perishables.
- 45. Factors Affecting Elasticityof Supply 5) Time Factor: Longer the time period, greater will be the elasticity of supply. Because, over a longer period of time, more and more factors are easily available and their input can be changed to increase ( or decrease) output of the commodity.