myepathshala.com (For Crash Course & Revision)

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1 Chapter 9. Supply Meaning of Supply Supply refers to quantity of a commodity that a firm is willing and able to offer for sale in the market at a given price during a given period of time. The definition of supply highlights 4 essential elements: (i). Quantity of a commodity. (ii). Abilities and Willingness to sell. (iii). Price of the commodity. (iv). Period of time. Types of Supply :-Supply also can be either for a single seller (Individual Supply) or for all the sellers (Market Supply). 1. Individual Supply refers to quantity of a commodity that an individual firm is willing and able to offer for sale at a given price during a given period of time. 2. Market Supply refers to quantity of a commodity that all the firms are willing and able to offer for sale at a given price during a given period of time. Supply and Stock Stock refers to total quantity of a particular commodity that is available with the firm at a particular point of time. On the other hand, supply is that part of stock which a producer is willing to bring in the market for sale. Stock can never be less than the supply. For example, If a seller has 50 tonnes sugar in his godown and he is willing to sell per kg, then supply is 30 tonnes and stock is 20 tonnes. Difference between Supply and Stock 1. Supply refers to the quantity, which a producer is willing to offer for sale, which changes with change in price, whereas, stock indicates a fixed quantity. 2. Supply relates to a period of time, whereas, stock relates to a particular point of time. Determinants of Supply (Individual Supply) 1. Price of the Given Commodity : The most important factor determining the supply of a commodity is its price. As a general rule, price of a commodity and its supply are directly related. It means, as price increases, the quantity supplied of the given commodity also rises and vice-versa. It happens because at higher prices, there are greater chances of making profit. It induces the firm to offer more for sale in the market. 2. Prices of Other Goods : Increase in the prices of other goods makes them more profitable in comparison to the given commodity. As a result, the firm shifts its limited resources from production of the given commodity to production of other goods. For example, Increase In the price of Other Good(Say, wheat) will induce the farmer to use land for cultivation of wheat in place of the given commodity (say, rice) Contact No

2 3. Prices of Factors of Production (inputs) :- When the amount payable to factors of production and cost of inputs increases, the cost of production also increases. This decreases the profitability. As a result, seller reduces the supply of the commodity. On the other hand, decrease in prices of factors of production or inputs, increases the supply due to fall in cost of production and subsequent rise in profit margin. 4. State of Technology : Technology changes influence the supply of a commodity. Advanced and improved technology reduces the cost of production, which raises, the profit margin. It induces the seller to increase the supply. However, technological degradation or complex and outdated technology will increase the cost of production and it will lead to decrease in supply. 5. Government Policy (Taxation Policy) : Increase in taxes raise the cost of production and, thus, reduces the supply, due to lower profit margin, On the other hand, tax concessions and subsidies increase the supply as they make it more profitable for the firms to supply goods. Determinants of Market Supply Market supply is influenced by all factors affecting individual supply. In addition, it is also affected by the following factors: 1. Number of Firms in the Market : When the number of firms in the industry increases, market supply also increases due to large number of producers producing that commodity. but, market supply will decrease, if some of the firms start leaving the industry due to losses. 2. Future Expectation Regarding Price :If sellers expect a rise in price in near future, then current market supply will decrease in order to raise the supply in future at higher prices. However, if the sellers fear the prices will fall in the future, then they will increase the present supply to avoid losses in future. 3. Means of Transportation and Communication : Proper infrastructural development, like improvement in the means of transportation and communication, help in maintaining adequate supply of the commodity. Supply Function Supply function shows the functional relationship between quantity supplied for a particular commodity and the factors influencing it. Individual Supply Function Individual supply function refers to the functional relationship between supply and factors affecting the supply of a commodity. It is expressed as :Sx = f (Px, Po, Pf, St, T, G) Where, Sx = Supply of the given commodity x, Px= Price of given commodity X, Po = Price of other goods, Pf = Prices of factors of production St = State of technology T = Taxation policy of Govt. G = Goals of the firm.(profits, Sale volume) Contact No

3 Market Supply Function Market supply function refers to the functional relationship between market supply and factors affecting the market supply of a commodity. Market supply function is expressed as : Where Sx = f (Px, Po, Pf, St, T, G, N, F, M) Sx = Market supply of the given commodity x, Px = Price of given commodity X, Po = Price of other goods, Pt = Prices of factors of production St = State of technology T = Taxation policy G = Goals of the firm. N = Numbers of firms F = Future expectation regarding Px M = Means of transportation and communication Supply Schedule Supply schedule is a tabular statement showing various quantities of a commodity being supplied at various levels of price, during a given period of time. Supply schedule is of two types 1. Individual Supply Schedule 2. Market Supply Schedule Individual Supply Schedule Individual supply schedule refers to a tabular statement showing various quantities of a commodity that a producer is willing to sell at various level of price, during a given period of time. Individual Supply Schedule Price (Rs.) Quantity supplied of goods x (units) Market Supply Schedule Market supply schedule refers to a tabular statement showing various quantities of a commodity that all the producers are willing sell at various levels of price, during a given period of time. It is obtained by adding all the individual supplies at each and every level of price. Market Supply Schedule Price (Rs.) Px Individual Supply (units) SA SB Market Supply (units) (SA + SB) 5+ = = = = = Contact No

4 Supply Curve Supply curve refers to a graphical representation of supply schedule indicating positive relationship between price of a commodity and its quantity supplied. Supply curve is of two types 1. Individual supply curve 2. Market supply curve Individual Supply Curve Individual supply curve refers to a graphical representation of individual supply schedule. The supply curve SS slope upwards due to positive relationship between price and quantity supplied. Market Supply Curve Market supply curve refers to a graphical representation of market supply schedule. It is obtained by horizontal summation of individual supply curves. Market supply curve (SM) is obtained by horizontal summation of the individual supply curves (SA and SB).Market supply curve SM is also positively sloped due to positive relationship between price and quantity supplied. Market Supply Curve is Flatter Market supply curve is flatter than all individual supply curves. It happens because with a change in price, the proportionate change in market supply is more than the proportionate change in individual supplies. Law of Supply Law of supply states the direct relationship between price and quantity supplied, keeping other factors constant (ceteris paribus). Assumption of Law of Supply While stating law of supply, the phrase keeping other factors constant or ceteris paribus is used. This phrase is used to cover the following assumptions on which the law is based : 1. No change in Price of other goods. 2. No change in the state of technology 3. No change in Prices of factors of production. 4. No change in the taxation policy 5. No change in Goals of the producer Contact No

5 Reasons for Law of Supply 1. Profit Motive : The basic aim of producers, while supplying a commodity, is to secure maximum profits. When price of a commodity increases, without any change in costs, it raises their profits. So, producers increase the supply of the commodity by increasing the production. On the other hand, with fall in prices, supply also decreases as profit margin decreases at low prices. 2. Change in Numbers of Firms : A rise in price induces the prospective producers to enter into the market to produce the given commodity so as to earn higher Profits. Increase in number of firms raises the market supply. 3. Change in Stock : When the price of a good increases, the sellers are ready to supply more goods from their stocks. However, at a relatively lower price, the producers do not release big quantities from their stocks. They start increasing their inventories with a view that price may rise in near future. Exceptions to Law of Supply 1. Future Expectations : If sellers expect a fall in price in the future, then the law of supply may not hold true. In this situation, the sellers will be willing to sell more even at a lower price. However, if they expect the price to rise in the future, they would reduce the supply of the commodity, in order to supply the commodity later at a high price. Ex- Shares, Land. 2. Agricultural Goods : The law of supply does not apply to agricultural goods as their production depends on climate conditions. If due to unforeseen changes in weather, the production of agricultural products is low, then their supply cannot be increased even at higher prices. Ex- Pulses, wheat, Rice. 3. Perishable Goods : In case of perishable goods, like vegetables, fruits, etc., sellers will be ready to sell more even if the prices are falling. It happens because sellers cannot hold such goods for long. 4. Rare Articles : Rare, artistic and precious articles are also outside the scope of law of supply. For example, supply of rare articles like painting of Mona Lisa cannot be increased, even if their prices are increased. 5. Backward Countries : In economically backward countries, production and supply cannot be increased with rise in price due to shortage of resources. Ex- African countries. Movement Along the Supply Curve (Change in Quantity Supplied) (Due to Price) When Quantity supplied of a commodity changes due to change in its own price, Keeping other factors constant, it is known as change in quantity supplied Contact No

6 Shift in Supply Curve (Change in Supply)(Due to other factors) A change in one of other factors shifts the supply curve. Various Reasons for Shift in supply Curve: (i) Change in the price of other goods: (ii) Change in the price of factors of production; (iii) Change in the state of technology; (iv) Change in taxation policy; (v) Change in objectives of the firm; (vi) Change in the number of firms; (vii) Future expectation of change in price. Basis Movement along Supply Curve Shift in Supply Curve Meaning When the quantity supplied changes due to change in price, keeping other factors constant, it leads to a movement along the supply curve. When the supply changes due to change in any factor other than the own price of the commodity. It leads to a shift in supply curve Contact No

7 Effect on Supply curve Reason The movement is along the same Supply curve (see Fig.) either upward (Known as Expansion in Supply) or downward (known as contraction in supply). It occurs due to an increase or decrease in the price of the given commodity. The shift in the supply curve is either rightward (known as increase in supply) or leftward (known as decrease in supply). It occurs due to a change in other factors, like change in the price of inputs, change in taxes, change in technology etc. Tabular Price (Rs) 12 Supply (Units) Price (Rs) Supply (Units) Tabular Presentation Price (Rs) 12 Supply (Units) Price (Rs) Supply (Units) Price Elasticity of Supply Price elasticity of supply refers to degree of responsiveness of supply of a commodity with reference to change in the price of such 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 1. Percentage Method(Proportionate Method) The most common method for measuring price elasticity of supply (Es) is percentage method. This method is also known as Proportionate Method. Percentage Change in quantity supplied Price elasticity of supply (Es) = Percentage change in price Elasticity of Supply (Proportionate Method) = Q P X P Q Price Elasticity of Supply is Positive Elasticity of supply will always have a positive sign as against the negative sign of elasticity of demand. It happens because of the direct relationship between price and quantity supplied Contact No

8 3. Geometric Method According to geometric method, elasticity is measured at a given point on the supply curve. This method is also known as Arc Method or Point Method. Es> 1 When a straight line supply curve shoots from the Y-axis. Es = 1 When a straight line supply curve shoots from the origin. Es< 1 When a straight line supply curve shoots from the X-axis. Kinds of Elasticities of Supply 1. Perfectly Elastic Supply : Supply of a commodity is said to be perfectly elastic when its supply expands or contracts to any extent without any change in the price. In this condition, Es = and the supply curve is a horizontal straight line parallel to the X-axis. It is imaginary. 2. Perfectly Inelastic Supply : When the supply does not change with change in price, then supply for such a commodity is said to be perfectly inelastic. In such a case, Es = 0 and the supply curve (SS) is a vertical straight line parallel to the Y-axis. It is imaginary. 3. Highly Elastic Supply : When percentage change in quantity supplied is more than the percentage change in price, then supply for such a commodity is said to be highly elastic. In such a case, Es> 1 and the supply curve has an intercept on the Y-axis. (In this condition, the straight line supply curve intersects the X-axis in its negative range ) (or cuts Y- axis/ price axis) Contact No

9 4. Less Elastic Supply : When percentage change in quantity supplied is less than the percentage change in price, then supply for such a commodity is said to be less elastic. In such a case Es< 1 and the supply curve has an intercept on the X-axis. (supply curve intersects the X-axis in its positive range ) (or cuts the X-axis/ quantity axis). 5. Unitary Elastic Supply : When percentage change in quantity supplied is equal to percentage change in price, then supply for such a commodity is said to be unitary elastic. In such a case, Es = 1 and supply curve is a straight line passing through the origin, irrespective of the angle that it makes or how flat or steep it is. Some Special Properties/Features 1. All the supply curves, which pass through the origin are unitary elastic: In A, B and C are the supply curves of three different commodities. The price elasticity of supply for all 3 curves is equal to one. Although A is steeper and C is flatter, but elasticity will be equal to one. It means, any straight line supply curve, which passes through the origin has unitary elastic supply (proved under geometric method), irrespective of the angle it makes with the origin. 2. Flatter the curve, more is the Elasticity at the point of intersection: In Fig. supply curves SS (Flatter curve) and S1S1 (steeper curve) intersect each other at point E. At point E, OQ quantity is supplied at the price of OP. When price falls from OP to OP1, Quantity supplied falls from OQ to OQ2 for supply curve SS and from OQ to OQ1 for supply curve S1S1. Now, with the same change in price (PP1), change. In supply (QQ2) in case of supply curve SS is more than change in supply (QQ1) under supply curve S1S1. It means supply is more elastic in case of SS (flatter curve) as compared to S1S1 (steeper curve). Time Period and Supply From the view point of supply, time has been broadly divided into three periods: Contact No

10 1. Market Period(Very Short Period) (Perfectly Inelastic) Market period refers to a very short period in which the supply cannot be changed in response to the change in demand. Supply in market period price is limited by the existing stock of the goods. Like in case of perishable goods (vegetables, fruits, milk, etc.). Therefore, the supply curve is a straight line parallel to the Y-axis 2 Short Period Short period refers to a period in which output (supply) can be changed by changing only variable factors. The supply curve is less elastic. Supply curve is upward sloping and steeper. 3 Long Period Long period refers to a period in which output (supply) can be changed by changing all factors of production. Therefore, supply becomes more responsive to change in demand. The supply curve is highly elastic. Supply curve is upward and sloping & flatter. Factors Affecting Elasticity of Supply 1. Nature of Commodity Durable Perishable 2. Cost of Production Cost of output more Cost of output less 3. Time Period Short time period Long time period 4. Technique of Production Simple technique Complex technique 5. Risk Taking Capacity More risk taking capacity Low risk taking capacity Elastic supply. Inelastic supply. Inelastic Elastic Inelastic Elastic Elastic Inelastic Elastic Inelastic - - Contact No

11 6. Natural Constraints Production depends on nature Production do not depends on nature Inelastic Elastic 7. Availability of Inputs:- If easily available - Elastic Not easily available Supply inelastic Supply If refers to various quantities offered for sale at different possible price of the commodity. Quantity Supplied It refers to a specify amount offered for sale at a specific price of the commodity. Price of Pen (Px) Quantity supplied (Py) Price of pen (Px) Quantity supplied (Py) Q-What are the reasons for the operation of the law of supply Or Why supply curve stopper upward. According to law of supply quantity supplied increase with the rise in prices and decrease with fall in its price reason are following. (a) Reasons for increase in Quantity supplied with rise in prices:- Px, Sx Seller become ready to offer more goods from their old stocker. Producer increase their production to reach higher profit possibilities. Fearless entrance into market. (b) Reasons for decrease in Quantity supplied with fall in prices:- Px, Sx Seller withdraws Stock of goods from the market. Producers reduce their output due to lower profit possibilities. Some incompetent firms will exit Contact No