Supply elasticity

TOPIC:
SUPPLY ELASTICITIES AND
THEIR MANAGERIAL USES:

INTRODUCTION
SUPPLY:
 Supply is the quantity of a commodity which is
actually offered for sale at a given price during some
particular time.
 Supply is that part of stock which is actually
brought into market.
Supply is a part of stock which a seller is ready to sell at
a certain price during a certain time.

LAW OF SUPPLY:
 It states that “other things remaining the same ,
quantity supplied of a commodity is directly related to
the price of the commodity.”
 Supply schedule: it is a tabular statement that gives
the law of supply.
 Supply curve :it shows graphically the direct
relationship between quantity supplied of a
commodity and its price.

REASONS BEHIND UPWARD
SLOPING OF SUPPLY CURVE:
 Law of diminishing marginal utility: The law states
that a more units of the variable factor are employed,
the addition made to total production falls that is cost
of production rises .Thus ,more quantity is supplied
only at higher prices so as to cover the rise of cost of
production.
 Goal of profit maximisation: The aim of producers
is to maximise profits .The aim can be achieved by
raising the price of goods .At higher price producers
increase the supply of goods.

SUPPLY FUNCTION:
It is the functional relationship between quantity
supplied of a commodity and factors affecting it.
S x = f(P x ,P z, T, C ,G p)
where, S x = supply of a commodity.
f =function of.
P x = price of commodity x.
P z = price of related goods ,z .
T = technological changes
C = Cost of production.
G p = government policy.

HOW RELATED?????
 Price of the commodity : At higher price, producer offers more
quantity of the commodity for sale and at a lower price , less
quantity of commodity is offered for sale.
 Price of related goods: Supply of a commodity depends upon
the price of related goods specially substitute goods . If the price
of a commodity remains constant and the price of substitute
goods , z increases , the producer prefers to produce z , as a
result supply of commodity b x reduces and that of substitute z
will increase .Thus an increase in price of substitute goods will
lead to decrease in supply curve of other good and vice versa.
.

 State of technology: If there is a change in technique
of production leading to fall in the cost of production,
supply of commodity increases.
 Cost of production: A change in cost of production
that is prices of factors of production also affects the
supply , if wages , labour or price of raw material
increase them MC of production will rise . As a result
supply of goods will fall because producers of goods
would prefer to produce some other commodities that
can be procured at a lower cost.
 Government policy: If heavy excise taxes are
imposed on a commodity ,it will discourage producers
and as a result supply will decrease . it is because
excise duty is levied on the total cost of a firm.

PRICE ELASTICITY OF SUPPLY
PRICE ELASTICITY OF SUPPLY IS DEFINED AS THE RESPONSIVENESS OF
QUANTITY SUPPLIED OF A COMMODITY TO CHANGE IN ITS OWN PRICE.
Es= PercentageChange in Quantity Supplied
_______________________________________________________________________________
percentageChange in Price
= ∆Q P
_____________ . ____________
∆P Q
positive sign indicates that price and quantity of a good are positively related and
vice-versa.

DETERMINANTS OF ELASTICITY OF
SUPPLY
1. TIME FACTOR
2. NATURE OF GOOD
3. PRODUCTION CAPACITY
4. PRODUCTION METHODS AND TECHNIQUES
5. STAGE OF LAW OF SUPPLY
6. FUTURE PRICE EXPECTATION
7. NUMBER OF PRODUCTS BEING PRODUCEDBY AN INDUSTRY.

PERFECTLY INELASTIC SUPPLY (Es=0)
When supply of a commodity does not
change irrespective of any change in its price

INELASTICSUPPLY (0<Es<1)
When percentage change in quantity supplied is
less than percentage change in price.

UNITARY ELASTIC SUPPLY (Es=1)
Percentage change in quantity supply equals the
percentage og change in price.

ELASTIC SUPPLY (1<Es<∞)
When percentage of change in quantity supply is
more than the percentage of change in price.

PERFECTLY ELASTIC SUPPLY(Es=∞)
When its supply expands(rise) or contacts(falls) to any
extent without any change in the price.

Coeff. of Es Types of Es Description Shape of supply
curve
1. Es = 0 Perfectly inelastic
supply
This occurs when to a %
change in price there is no
change in quantity
supplied.
Vertical i.e. parallel
to y –axis.
2. 0 < Es < 1 Inelastic supply This occurs when there is a
% change in price there is
lesser change in quantity
supplied.
Upward sloping
originating from x-
axis.
3. Es = 1 Unitary elastic
supply
This occurs when to a %
change in price there is
equal change in quantity
supplied.
Upward sloping
originating from
origin.
4. 1 < Es < ∞ Elastic supply This occurs when to a %
change in price there is
more than proportionate
change in quantity
supplied.
Upward sloping
originating from y-
axis.
5. Es = ∞ Perfectly elastic
supply
This occurs when there is
infinite change in quantity
supplied at a price.
Horizontal i.e.
parallel to x-axis.

Measurement of elasticity
of supply
A. PERCENTAGE METHOD
B. GEOMETRIC METHOD

PERCENTAGE METHOD
Elasticityofsupplyismeasuredbytheformula:
If the value of :
1. Es > 1 → supply is elastic
2. Es = 1 → supply is unitary elastic
3. Es < 1 → supply is inelastic
The value of Es ranges from zero to infinity.
Es = Percentage ChangeinQuantity Supplied
______________________________
percentage Changein Price
= ∆Q P
________ . ________
∆P Q

GEOMETRICMETHOD
a. Any straight line supply curve passing through the origin has the
value of elasticity equal to one.
b. If any straight line supply curve goes through the quantity axis, it is
inelastic.
c. if a straight line supply curve goes through the price axis i.e. y-axis it
is elastic
d. If a straight line supply curve is parallel to x-axis and y-axis it is
perfectly elastic and inelastic supply respectively.

Uses Of Elasticity
The concept
elasticity is
very useful to
producer and
businessman
to make
pricing
decision.
The major
importance
of elasticity is given
below;
• Classification of
goods
• Classification of
Market
• Pricing Policy
• Determination of
boundaries
between industries

Classification Of Goods
Goods are classified into substitute and complementary.
If elasticity of demand between any two goods is positive, the goods may be
considered as substitute for each other.
If the elasticity is greater, the good are closer substitute.
If it is infinite, they are perfect substitute.
If the elasticity of demand for any two related goods is negative, the two
goods may be considered as complementary for each other. If the negative
elasticity of demand is high, the degree of complementarily is also high.

Market Classification
If the elasticity is infinite, the market
is perfectly competitive.
If the elasticity is zero or almost zero,
the market structure is monopoly.
If the elasticity is high there is
imperfect market

Pricing Policy
Large firms produce different related goods.
For example Nepal Liver Limited produces various
brands of tooth paste & tooth brush. They are
complementary goods.
Similarly, Nepal Dairy Limited produces ice-cream of
different flavor.
Elasticity helps firms to decide whether to increase price
of related products or not.

Determination of boundaries
between industries
Concept of elasticity is useful in order to
decide to which product should include in
which industry.
If related goods having negative elasticity
(complementary goods), they belong to
different industries.
If the related goods having positive
elasticity (substitute goods), they belong
to one industry.

Supply elasticity

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Supply elasticity