Supply And Elasticity Of Supply Class 12 Economics

STOCK :: It is PART OF GOODS PRODUCED which is unsold.In other words, it represents total quantity of commodity available with sellers in market at given time where as Supply is that PART OF STOCK WHICH IS ACTUALLY BROUGHT into market during given period of time

EXAMPLE :: After harvest, a farmer acquires large stock of a crop. In this period price tends to below. The Farmer holds back his stock. he doesn’t offer all of his stock . Gradually as the price rises, the farmer offer more and more stock for sale {supply} For instance, supply of oil is NOT THE TOTAL AVAILABLE STOCK OF OIL, but only that amount which producers are willing to bring to the market for sale.

SUPPLY FUNCTION :: It shows mathematical or functional relationship between supply and its various determinants(factor affecting supply)

S_X = F (P_X, P_Y, P_F, T, G, F.E)

Market S_X = F( P_X, P_Y, P_F, T, G, F.E, N_F, G_P)

SUPPLY OF COMMODITY AND PRICE OF COMMODITY (S_X & P_X)

LAW OF SUPPLY  “ Other thing being constant, quantity supplied and price of the commodity is POSITIVELY  RELATED.In other words with rise in price, quantity supplied rises and with fall in price quantity supplied falls i.e. P   Q.S , P   Q.S

ASSUMPTION ::  P_Y, P_F, T, G, F.E, N_F, G_P that is all other thing being constant (ceteris peribus)

SUPPLY SCHEDULE :: It is TABULAR PRESENTATION of Quantity supplied at different price at given time.

It is clear from the table as price decreases, supply contracts. At a price Rs1 or less the seller is not willing to sell any unit. This PRICE AT WHICH SELLER IS NOT PREPARED TO SELL ANY UNIT and prefers to stock the commodity is called MINIMUM PRICE OR RESERVE PRICE 

SUPPLY CURVE :: It is GRAPHICAL PRESENTATION of quantity supplied at different price.It represent supply schedule on a curve. It REPRESENT SUPPLY SCHEDULE ON A CURVE.

⇒  ‘OR’ is reserve price. At ‘OP’ price quantity supplied is ‘OS’ and as price increase to ‘OP₁’quantity supplied extends to ‘OS₁’

LAW OF SUPPLY IS QUALITATIVE, NOT QUANTITATIVE :: LOs makes a qualitative statement only that is it INDICATES ONLY THE DIRECTION OF CHANGE in the amount supplied and doesnot indicate the mangnitude of change .Thus it fails to answer “ HOW MUCH CHANGES” will result due to change in price of good concerned

LAW OF SUPPLY IS ONE SIDED as it explains the effect on quantity supplied due to change in price .It FAILS TO STATE T HE EFFECT ON PRICE DUE TO CHANGE IN QUANTITY SUPPLIED. Thus it assume quantity supplied to be passive factor

REASON FOR LAW OF SUPPLY

(1) PROFIT MOTIVE :: The basic aim of every producer / seller is to secure maximum profits. When price of a commodity increases , without any change in cost , it raises their profit. So , producer increases the supply of the commodity by increasing their production. On the other hand , with fall in prices , supply decreases due to reduced pfofit margin at low price. 

(2) CHANGE IN NUMBER OF FIRM :: A rise in price induces the prospective producers to enter into the market to produce the given commodity so as to earn higher profits whereas fall in price forces the producer to stop production or reduce it.

(3) CHANGE IN STOCK :: W hen price of good increases , sellers are ready to open their stock which means more supply.

SUPPLY AND PRICE OF RELATED GOODS (SUBSTITUTE GOOD) (S_X &P_Y)
An increase in price of other (related) goods makes them more profitable and hence the firm increases the supply of the goods the price of which has risen (i.e. supply of substitute good) and thereby decreasing the supply of the commodity the price of which has not risen.

⇒  It explains the SHIFT OF SUPPLY CURVE e.g if a farmer is producing corn and wheat on agiven piece of land.

(1) If the market price of wheat falls,farmer will  produce more corn (as production increases from OL to OM at existing price) due to increase in profitability.This will shift the supply curve of corn to RIGHT FROM SS TO S¹S¹ 

(2) If the market price of wheat rises,farmer will produce less corn (as production decreases from OL to ON at existing price) due to decrease in profitability.This will shift the supply curve of corn to LEFT FROM SS TO S²S²

SUPPLY AND TECHNOLOGY

Technology improvement means
(a) more output with same level of input or          
(b) same level of output with less input.

Thus improvement in technology tends to LOWER THE MARGINAL AND AVERAGE COST OF PRODUCTION
e.g. PRINTING OF BOOK was a complex and costly process. With introduction of computers it has become an easy and inexpensive job.The AC and MC facing a commercial publisher has decreased many times.This COST-SAVING TECHNOLOGY motivate suppliers to supply more at existing price.This causes RIGHTWARD SHIFT in supply curve

(1) SS is original supply curve .It increases to S¹S¹ rightward indicating increase in supply from OL to OM due to technological improvement (or reduction in cost)

Similarly a COST INCREASING TECHNOLOGY change which may be due to

→ Technology degradation
→ Environment Technologies
→ Outdated Technologies

WILL cause supply to reduce and supply curve will shift leftward

SUPPLY AND INPUT PRICE CHANGE

(1) In case of DECREASE IN INPUT PRICE like decrease in raw material cost, wages of labour, rent reduction,the overall COP DECREASES and accordingly producers are willing to supply MORE AT EXISTING PRICE.This causes supply curve to shift RIGHTWARD from SS to S¹S¹ at price OP

EXAMPLE :: To make icecream, firm need various inputs like cream, sugar, machine, labour etc. When price of one or more of these input falls , producing ice creams will become more profitable and hence more will be supplied

(2) In case of INCREASE IN INPUT PRICE like increase in raw material cost, wages of labour, rent enhancement,the overall COP INCREASES and accordingly producers are willing to supply LESS  AT EXISTING PRICE.This causes supply curve to shift LEFTWARD from SS to S²S² at price OP

SUPPLY AND GOAL OF THE FIRM

(a) If Goal of the firm is to MAXIMIZE PROFIT, then the firm will be interested in supplying more quantity only at high price

(b) If Goal of the firm is to MAXIMIZE SALES OR EMPLOYMENT, then the firm will be prepared to sell or produce even at existing price.Thus shift of objective from profit or wealth maximizing to sales maximizing or gaining market share causes supply curve to shift rightward from SS to S¹S¹ at existing price OP (same fig.) 

SUPPLY AND EXPECTED FUTURE PRICE

(a) If the seller expects the FUTURE PRICE OF THE COMMODITY TO FALL,he will try to clear stock  of the commodity so as to avoid loss in future  due to decrease in price and hence this WILL INCREASE THE CURRENT SUPPLY of the commodity from OL to OM and will shift the supply curve to right from SS to S¹S¹(same fig.)

(b) If the seller expects the FUTURE PRICE OF THE COMMODITY TO RISE, he will stock the commodity so as to sell in future and earn the extra profit due to rise in price and hence this will DECREASE THE CURRENT SUPPLY of the commodity from OL to ON and will shift the supply curve to left from SS to S2S2(same fig.)

MARKET SUPPLY AND NO. OF FIRM

It effects market supply as MORE FIRM in the market means more supply e.g if every farmer starts producing wheat,then the production will be more and hence supply of wheat will increase from OL to OM and will shift the market supply curve to right from SS to S¹S¹ 

Similarly with DECREASE IN NUMBER OF FIRMS the supply will decrease from OL to ON and will shift the supply curve to left from SS to S²S²

EXCEPTION TO LAW OF SUPPLY OR CASES WHEN LAW FAILS :: It refers to situation or products where high prices donot leads to expansion of supply and vice-versa

(1) SOCIAL DISTINCTION GOODS :: Supply of such goods are fixed or limited and cannot be increased even if price for them are rising eg. there is one and only one genuine mona-lisa painting and Tipu sultan sword

(2) AGRICULTURAL PRODUCT :: Supply of such goods depends upon natural factors like rainfall,temperature. If these factors are against the production supply will decrease even if people are ready to pay high price 

(3) PERISHABLE GOODS :: Those goods which GET SPOILED EASILY and hence cannot be stocked eg.milk,vegetables,egg .This makes supply of perishable goods fixed at a given point of time.

(4) BACKWARD COUNTRIES :: In economically backward countries , production and supply cannnot be increased with rise in price due to shortage of resources

MARKET SUPPLY CURVE

It is GRAPHICAL PRESENTATION of  supply of a particular commodity by ALL THE FIRM in the market AT DIFFERENT PRICES  during given time.It is presentation of market supply scheduled

Suppose there are two sellers A and B in the market with their respective supply schedule.

At price Rs.1 seller A is ready to sell 10 units i.e OA units and seller B is willing to sell 20 units i.e. OB units,at this price market supply is 10+20 = 30 units which is

⇒ By repeating this process at each possible price market supply curve is derived whichis horizontal submission of individual supply curve.

MARKET SUPPLY CURVE IS FLATTER :: MARKET supply CURVE IS FLATTER THAN all the individual supply curves. It happens because as prices changes , proportionate change in market supply is more than proportionate change in individual supplies.

CHANGE IN QUANTITY SUPPLIED  VS CHANGE IN SUPPLY

B.O.D	MOVEMENT ALONG SUPPLY  CURVE // CHANGE IN QUANTITY SUPPLIED	SHIFT IN SUPPLY CURVE //  CHANGE IN SUPPLY
(1) MEANING	The quantity supplied increases or decreases due to rise or fall in price only,	The quantity supplied increases or decreases due to change in other factor keeping price constant
(2) CAUSE	It occurs due to change in price of good only	It occurs due to change in other factor like (PY, PF, T, G, F.E, NF, G)
(3) SITUATION  OF SUPPLY  CURVE
(4) TYPES OF  CHANGE	(A) EXTENSION OF SUPPLY  (increase in quantity supplied) :: When supply increases due to rise in price.It is UPWARD MOVEMENT (B) CONTRACTION OF SUPPLY (decrease in  quantity supplied) :: When supply decreases due to fall in price. It is DOWNWARD MOVEMENT	(A) INCREASE IN SUPPLY :: When supply increase due to others factors like introduction of cost-saving technology. It is a RIGHTWARD SHIFT (B) DECREASE IN SUPPLY :: When supply decreases due to other factors like introduction of cost increasing technology. It is a LEFTWARD SHIFT

IDENTIFY THE FOLLOWING AS CHANGE IN QUANTITY SUPPLIED OR CHANGE IN SUPPLY

(a) The market price of apple increases , thus the quantity supplied of apple also increases
(b) The price of oranges decreases so the annual production of grapes increases
(c) Automobiles workers get a 5 % wage increase and so production of automobiles decreases
(d) Due to fall in price of paper , the production of paper decreases

DISTINGUISH BETWEEN

B.O.D	EXTENSION OR INCREASE IN  QUANTITY SUPPLIED	INCREASE IN SUPPLY
(1) MEANING	The quantity supplied increases due to rise in price of good only	The quantity supplied increases due other factors like introduction of cost- saving technology
(2) EXAMPLE
(3) TYPES OF  CHANGE	It is UPWARD MOVEMENT and thus refers to more sale at high price	It is RIGHTWARD SHIFT and thus refers to More sales at same (given) price.
(4) SITUATION  OF SUPPLY  CURVE

B.O.D	CONTRACTION OR DECREASE  IN QUANTITY SUPPLIED	DECREASE IN SUPPLY
(1) MEANING	The quantity supplied decreases due to fall in price of good only.	The quantity supplied decreases due other factors like introduction of cost -  increasing technology
(2) EXAMPLE
(3) SITUATION  OF SUPPLY  CURVE
(4) TYPES OF  CHANGE	It is DOWNWARD MOVEMENT and thus refers to less sale at low price	It is LEFTWARD SHIFT and thus refers to less sale at same (given price) price.

CAUSES FOR INCREASE IN SUPPLY // RIGHTWARD SHIFT OF SUPPLY CURVE // WHY SELLER SELLS MORE AT SAME PRICE (GIVEN PRICE)

(a) Price of competitive good or substitute falls and it is profitable for seller to sell more of own good
(b) Improvement in technology that leads to cost saving
(c) Price of input decreases which reduces cost
(d) Goal of the firm changes to sales or employment maximizing
(e) Seller expects future price to reduce and hence increases its sale to clear the stock
(f) Tax reduction or rebate policy of govt. (In short govt. have Deficit Budget)

CAUSES FOR DECREASE IN SUPPLY // LEFTWARD SHIFT OF SUPPLY CURVE // WHY SELLER SELLS LESS AT SAME PRICE (GIVEN PRICE)

SUPPLY CURVE IS RISING PART OF MC CURVE

The concept of supply curve APPLIES TO THE CONDITION OF PERFECT COMPETITION ONLY. It does not apply to monopoly and monopolistic competition

As we know equilibrium is reached where MR = MC and MC is rising. Under perfect competition since AR(P) = MR , therefore the firm will produce output where 

⇒ In short run , if the firm decides to stop production for sometime then it will have to bear theexpenditure on fixed cost. This means as long as firm is recovering variable cost that is AR (P) > AVC , the firm will continue to produce the goods .Thus it follows that  Short run supply curve of a perfectly competitive firm is that portion of marginal cost curve which lies above the average variable cost (AVC)

The firm will not supply at a price less than OP because atless than OP price , a firm would not be able to recover its variable cost. Pt “E” is equilibrium point as  MR = MC and MC is rising and hence OQ is the quantity supplied. Thus if we take P₁, P₂, P₃ in the figure, the level of output increases from Q₁ to Q₂ to Q₃, indicating positive relationship between quantity supplied and price of the commodity hence RISING PART OF MC above AVC IS THE SUPPLY CURVE

ELASTICITY OF SUPPLY

ELASTICITY OF SUPPLY :: It is degree of responsiveness of supply due to change in ANY VARIABLE AFFECTING SUPPLY.

PRICE ELASTICITY OF SUPPLY (E_S) :: It is DEGREE OF RESPONSIVENESS OF SUPPLY due to CHANGE IN ITS PRICE.

MARSHAL “Price elasticity of supply may be defined as percentage change in supply due to percentage change in price.

PROPERTIES // FEATURES

(1) It not only focus on direction of change but also TELLS MAGNITUDE OF CHANGE in supply i.e how much supply changes due to change in price. Thus it is QUALITATIVE AS WELL AS QUANTITATIVE MEASURE

(2) ELASTICITY IS A UNIT FREE MEASURE ::  It is measure in percentage terms therefore it is independent of choice of units that is not affected whether the quantity supplied is measured in kg or tonnes and whether price is measured in rupees or dolllars .This feature FACILITATES COMPARISION BETWEEN TWO OR MORE GOODS

(3) At the intersection of two supply curves the curve which is MORE FLATTER IS MORE ELASTIC OR HAVE HIGHER ELASTICITY

(4) Elasticity can be categorised into FIVE DEGREES depending upon its COEFFICIENT

DEGREES(TYPES) OF ELASTICITY OF SUPPLY

(1) PERFECTLY INELASTIC(E_S=0) :: It is a case when quantity supplied donot changes with change in price eg. IN CASE OF PERISHABLE GOOD SS IS FIXED IN SHORT PERIOD.

(2) PERFECTLY ELASTIC (ES= α) :: It is a case when supply changes infinitely with no change in price or with small change in price. In other words , there will be infinite rise with small rise in price and supply becomes zero with small fall in price

E.G :: a seller increases or decreases supply DUE TO FUTURE EXPECTATION even when there is no price change

(3) UNITARY ELASTIC(E_S=1) :: It is a case when proportionate(%) change in supply is exactly EQUAL TO proportionate(%) change in price.

(4) GREATER THAN UNITARY ELASTIC or  ELASTIC (E_S>1) :: It is a case when proportionate(%) change in supply is MORE THAN proportionate(%) change in price.

(5) LESS THAN UNITARY ELASTIC OR INELASTIC (E_S<1) :: It is a case when proportionate(%) change in supply is LESS THAN proportionate(%) change in price.

DEGREES OF  ELASTICITY OF SUPPLY - A COMPARISION

TWO METHOD FOR MEASURING PRICE ELASTICITY OF SUPPLY

(1) PERCENTAGE OR PROPORTIONATE METHOD

(2) POINT OR GEOMETRIC METHOD :: It is graphical method of determining elasticity of supply.This method tells E_S on the basis of points from where the supply curve starts.

Let OP be the original price which cuts SS curves in all the three panel at point A and hence quantity supplied is OC.The point where curve touches X-axis is Pt.B