Short Notes: Unit 3: Supply | Business Economics for CA Foundation PDF Download

Introduction 

Supply is an important part of economics. It means how much of a good or service sellers are willing and able to sell at different prices during a certain time. Sellers can be individuals, companies, or even the government. Usually, when the price of a product goes up, sellers want to sell more because they can earn more profit. Supply helps us understand how goods reach the market and how prices are decided. It also plays a big role in planning production and managing resources.

Key Points:

• Supply is what is offered, not necessarily sold.
• Requires both willingness and ability to supply, influenced by production costs.
• A flow concept, measured per unit of time (e.g., per day, week, or year).

Determinants of Supply

Supply is influenced by several factors beyond the price of the good itself:

Law of Supply

The law of supply states that, ceteris paribus, as the price of a good rises, the quantity supplied increases, and vice versa, due to the profit motive.

Supply Schedule Example (Good X):

Market Supply: Sum of individual firms' supplies at each price, derived by horizontally adding individual supply curves.

Movements vs. Shifts in Supply Curve

Movement Along Supply Curve: Caused by a change in the good's own price, leading to an increase (expansion) or decrease (contraction) in quantity supplied.

Shift in Supply Curve: Caused by changes in non-price determinants, shifting the curve right (increase in supply) or left (decrease in supply).

Right shift (increase) at price P from Q to Q1; left shift (decrease) from Q to Q1.

Elasticity of Supply

Elasticity of supply (Es) measures the responsiveness of quantity supplied to a change in price.

Formula: 

Example: Price of good X rises from ₹2000 to ₹2100, quantity supplied rises from 2500 to 3000 units.

Es = (500/2500) / (100/2000) = 0.2 / 0.05 = 4 (elastic).

Types of Supply Elasticity:

Determinants of Elasticity:

• Cost Changes: Low cost increases yield elastic supply; high costs make it inelastic.
• Production Complexity: Complex processes (e.g., aircraft) have lower elasticity.
• Time Period: Longer periods increase elasticity as firms adjust.
• Number of Producers: More producers and competition increase elasticity.
• Barriers to Entry: Fewer barriers increase elasticity.
• Spare Capacity: Excess capacity increases elasticity.
• Input Availability: Easy access to inputs increases elasticity.
• Factor Mobility: Mobile capital/labor increases elasticity (e.g., printing press switching products).
• Price Expectations: Expected future price rises reduce current elasticity.

Measurement:

• Point Elasticity: Example: Supply function Q = -100 + 10P, at P = ₹15, Q = 50. Es = 10 × (15/50) = 3.
• Arc Elasticity: 

Example: P₁ = ₹12, Q₁ = 20; P₂ = ₹15, Q₂ = 50. Es = (30/70) / (3/27) = 3.86.

Equilibrium Price

The equilibrium price (market-clearing price) is where quantity demanded equals quantity supplied, determined by the intersection of demand and supply curves.

Equilibrium at intersection of demand and supply curves.

Social Efficiency: At equilibrium, social surplus (consumer surplus + producer surplus) is maximized.

• Consumer Surplus: Difference between willingness to pay and actual price paid.
• Producer Surplus: Difference between price received and minimum price producers accept.

Social efficiency with maximum consumer and producer surplus at equilibrium.

Question for Short Notes: Unit 3: Supply

Try yourself:

What does the term 'Equilibrium Price' refer to?

• A.

  The lowest price a product can be sold for
• B.

  The price where supply equals demand
• C.

  The highest price a product can reach
• D.

  The price set by the government

Explanation

Equilibrium Price is the price at which the quantity of goods supplied equals the quantity demanded. This means that consumers are willing to buy the product at this price, and producers are willing to sell it.

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