Chapter 9 - Supply And Elasticity Of Supply - Chapter Notes, Micro Economics, class 12 - Commerce PDF Download

SUPPLY AND ELASTICITY OF SUPPLY

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 be low . 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.

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THREE ALTERNATIVE WAYS OF EXPRESSING SUPPLY
 (1) SUPPLY FUNCTION (2) SUPPLY SCHEDULE (3) SUPPLY CURVE

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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 (SX & PX)

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

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The law explains the cause for Movement along supply curve

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ASSUMPTION :: PY, PF, T, G, F.E, NF, GP 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.

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The curve is UPWARD SLOPING from left to right indicating positive relation between quantity
 supplied and price of the commodity.

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‘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 ONE SIDED as it explains the effect on quantity supplied due to change in price .It FAILS TO STATE THE 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 :: When price of good increases , sellers are ready to open their stock which means more supply .

SUPPLY AND PRICE OF RELATED GOODS (SUBSTITUTE GOOD) (SX &PY)

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.

 Thus supply of the commodity and price of its substitute are inversely related

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

(1) If the market price of wheat falls,farmer will producemore 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

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
leftward

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
 

SM = S₁ + S₂ + S₃ + ----------+ S_n

Graphically it is derived by Horizontal submission of individual supply curve

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 OA + OB = OM

By repeating this process at each possible price market supply curve is derived which is 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 .

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

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 P = MC .
In short run , if the firm decides to stop production for sometime then it will have to bear the expenditure 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 at less 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 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 OR VALUES
 

DEGREES(TYPES) OF ELASTICITY OF SUPPLY

(1) PERFECTLY INELASTIC(ES=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(ES=1) :: It is a case when proportionate(%) change in supply is exactly EQUAL TO proportionate(%) change in price.

SUPPLY CURVE STARTS FROM ORIGIN

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

SUPPLY CURVE STARTS FROM Y-AXIS OR NEGATIVE RANGE OF X-AXIS

(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.

SUPPLY CURVE STARTS FROM X-AXIS

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 ES 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

NUMERICALS
(Q1) If at price rs.10 Q.sold is 30 units, with increase in price by rs.2 Q.sold is 50 units.FIND E_S.

(Q2) At price rs.12,Q.S is 500 units,when price rises to rs.15 Q.S is 650 units.CalculateE_S .Is
supply elastic

(Q3) If at price rs.5 Q.sold is 300 units, how much will be supplied at rs.4 (Given E_S =2.5)
(Q4) If at price rs.8 Q.sold is 20 units, how much will be supplied if price reduces by rs.2 (Given E_S
=3)

(Q5) Due to 10% rise in price from rs.5,Q.supplied increase from 400 units to 450 units.Find E_S Is
supply inelastic

(Q6) Due to 5% fall in price supply decreases from 400 unitsby 25 units.Find ES Is supply elastic

(Q7) When price of the commodity becomes twice the original price , the quantity supplied
increased by an amount equal to 4 times the original quantity supplied . Calculate the coeffeicient
of price elasticity of supply ?

(ans 4)

(Q8) The supply curve of the commodity “B” passes through the origin and makes an angle of 60 degree . When its price rises by 40% , its quantity supplied rises by 10 units . calculate its original
supply ?

{ans 25 units}

(Q9) When price of a commodity fall by just 10% , the total revenue of a firm become half of the
original total revenue . if at the new price of rs 45 , only 10 units are supplied ,Calculate original
quantity supplied and also Es ?

{ ans 4.44}

(Q10) If ratio of change in quantity to original quantity is 0.4 and Es is 1.25 . calculate percentage
change in price ?

{ ans 32 % }

(Q11)
(a)Calculate E_S when price changes from rs2 to rs3 for both seller
(b)Why do elasticity differs in both cases even when absolute change in both cases
is same of 20 units

FACTOR EFFECTING ELASTICITY OF SUPPLY (ES)

(1) NATURE OF COMMODITY ::
(a)Perishable goods which cannot be stored eg. milk, vegetable have to be sold on same day and therefore supply is inelastic

(b)Durable goods can be stored until seller gets reserve price or demand generates,so it have elastic supply

(2) NATURE OF INPUT USED
(a) If production of a product requires input that are commonly used to produce other product,it will have more elastic supply as change in price will shift input from one to another use
(b) If production of a product requires specialised input that are not commonly used to produce other product,it will have inelastic supply
 

(3) NATURAL CONSTRAINT :: Goods which depends more on nature have INELASTIC SUPPLY eg agriculture products which depends upon rainfall ,temperature etc.
 

(4)TECHNIQUE OF PRODUCTION
(a) if production of a product requires technique that is complex and needs large stock of
capital,then supply of good will be inelastic as supply cannot be changed easily
(b)Goods involving simple technique of production will have elastic supply

(5) RISK TAKING :: The elasticity of supply depends upon the willingness of entrepreneurs to take risk. if entrepreneurs are willing to take risk, supply will be more elastic.On the other hand, if entrepreneurs hesitate to take risk, the supply will be inelastic

(6)TIME FACTOR OR TIME HORIZON ::
Very short period :: It is also called market period.Supply under such condition is perfectly inelastic and fixed upto level of stock available eg. perishable good having supply curve parallel to Y- axix
Short period :: In this production can only be increased by making full use of plant capacity but plant capacity cannot be altered as time period is short.Thus supply is elastic only to some extent
Long period :: In this production or supply can be adjusted according to the demand as additional factors( both variable as well as fixed) can be employed or discarded.It makes supply curve perfectly elastic