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| Supply in Economics | IndianTechnoEra |
Supply and quantity supplied
What is supply?
Supply is the amount of good or services that is available to consumers.
What is Quantity Supplied?
The number of goods or services that supplies that will produces and cell at a given market price.
Law of Supply
It states that other things remaining constant, quantity supplied of a commodity increases with increase in the price and decreases with a fall in the price.
Assumptions of Law of Supply
- Price of other related goods should not change
- Technology of production should not change
- Cost of production should remain the same
- Goal of the firm should not change
- Taxation policy of the govt. should not change
Representation of Supply (Schedule & Graph)
What is supply schedule?
Supply schedule is a tabular statement showing different quantities of a firm is ready to sell at different prices during a given period of time.
What is supply graph?
A supply graph in economics is a graphical representation of the relationship between the price of a product and the quantity supplied at that price.
The graph will typically depict a line that slopes upward from left to right, indicating that as the price increases, so too does the quantity supplied.
Market Supply Schedule
What is market supply schedule?
A market supply schedule is a table that shows the quantity of a good or service that a producer will offer for sale at different prices.
It shows the relationship between the price and quantity supplied, and is important in economics as it can be used to analyze market trends and predict future market outcomes.
Exceptions to the law of supply
Law does not apply strictly to the agriculture products whose supply is governed by natural resources.
Supply of goods having social distinction will remain limited even if their price tends to rise.
Sellers may be willing to sell more units of a perishable commodity at a lower price.
Expansion & Contraction of Supply
What is expansion of supply?
It refers to rise in supply due to rise in the price of good. It results in upward movement of the curve.
What is Contraction of Supply?
It refers to fall in supply due to fall in price of the good. It results in the downward movement of the curve.
Change in Supply (Shift)
Increase in Supply
It means more quantity supplied at the same price of the commodity.
It results in forward shift of supply curve.
Decrease in Supply
It means less quantity supplied at the same price of the commodity.
It results in backward shift of supply curve.
Elasticity and Elasticity of Supply
What is elasticity?
Elasticity is a measurement of the degree of responsiveness of supply to a change in price.
What is Elasticity of Supply?
The degree to which a change in price will change supply. Or,
If we change the price, will supply change a lot or a little?
Elasticity depends on how easy it is to change production
1. Price Elasticity of Supply=(%ΔQs / %ΔP)
2. Price-inelastic supply
3. Price-elastic supply
4. Unit-elastic supply
What is Price Elasticity of supply?
It is a measurement of percentage change in quantity supplied of a quantity supplied of a commodity in response to some percentage change in its price.
According to this method, elasticity of supply is the ratio between ‘percentage change in quantity supplied’ and ‘percentage change in price’ of the commodity.
Price Elasticity of Supply=(%ΔQs / %ΔP)
Es= ∆Q×P /∆P×Q
Es= Percentage Change in Quantity Supplied Percentage change in Price
There are two well known methods of measuring price elasticity of supply.
Methods of measuring Price Elasticity
There are following methods to measure the price elasticity:
- Proportionate method
- Geometric method
What is Price In-elasticity Supply?
Items that have supplies that are increased with great difficulty are INELASTIC, the supply will go up/down very little with a change in price.
Price In-elasticity of Supply is a term used in economics to describe a situation in which the supply of a good or service is relatively unresponsive to changes in price. That is, the quantity supplied does not change significantly when the price changes.
When the supply of a good or service is inelastic, the seller has more control over the price than the consumer, since the seller can raise the price without significantly impacting the demand for the product.
Ex. Cars (to increase production, need to build a new factory, hire 100s of workers, etc.)
Apples (to increase production, would have to plant more trees, taking years to grow and produce apples)
What is Price-elastic supply?
Items that have supplies that are increased easily are ELASTIC, the supply will go up/down a lot with a change in price.
Price-elastic supply is the measure of how sensitive the quantity of a good or service supplied is to a change in its price.
When a good or service has a price-elastic supply, a small increase in price will lead to a large decrease in the quantity supplied, and vice versa. This type of supply is usually seen in competitive markets where there are many suppliers.
Ex. CDs, Books, Pizza (all can increase supply with little difficulty; resources are easy to come by)
What is Unit-elastic supply?
Unit-elastic supply is a type of supply curve where the percentage change in quantity supplied is equal to the percentage change in price.
It is represented by a linear supply curve that is perfectly flat and runs parallel to the price axis. This type of supply curve indicates that the producer is not very sensitive to price changes and that they will be willing to supply the same amount of goods regardless of the price.
Bibliography / references
- Managerial Economics, GS Gupta, Tata-McGraw Hill, 2007
- Principles of Economics, DN Dwivedi, Prentice Hall India, 2004
- Economics, R L Varshney and KL Maheshwari, Sultan Chand & Sons, 2005
- Modern Economic Theory, KK Dewett, S. Chand & Company Ltd, 2005
- Managerial Economics, Dr. MS Subrahmanian, Ramesh Publications, 1995
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Key: Theory of supply, Contents, law of Supply, Assumptions of law of supply, Meaning of Supply Schedule and Curve, Exceptions of the law of supply, Shift in Supply and movement in supply, Elasticity of Supply, Supply: Concept, Law of Supply, Elasticity of supply, Interaction of Demand and Supply.