Chapter 4

Q1. What is Individual Supply and Market Supply?

Ans:

Individual Supply Schedule:

                                                It means tabular presentation of the supply made by an individual seller in the market at a given period of time and at a given price. For e.g.

Price	Quantity Supplied
10	20
20	30
30	40
40	50
50	60

 In the above schedule it can be clearly observed that when the price was 10 quantity supplied was 20 units but when price rises to 50 the quantity supplied rises to 60 units.

Market Supply:

                             It means tabular presentation of the supply made by all the sellers in the market at a given period of time and at a given price. It can be obtained by the horizontal summation of all the supply made by all the sellers. For e.g.

Price	Seller A	Seller B	Seller C	Market Supply
10	20	30	40	90
20	30	40	50	120
30	40	50	60	150
40	50	60	70	180
50	60	70	80	210

  In the above table it can be clearly seen that as the price rise the quantity supplied keeps increasing. When the price was 10 the market supply was 90 units but when price rise from 10 to 50 the quantity supplied also increased from 90 to 210 units.

Q2. Determinants of Supply.

Ans. The determinants are as follows:

1. Price:

               Price has a direct relation with supply. If the prise will rise the supply will also rise with the price and if price falls the supply will fall.

2. Cost of Productions:

                                         Cost of Production affects the supply as if there is rise in price of cost of production the supply will be less.

3. State of technology:

                                         Improvement in technology leads to decreased in cost of production which help in increase in the supply.

4. Government Policy:

                                         Government policy may encourage or discourage the seller to supply more goods in the market.

5. Nature of Market:

                                      In the market as there are large number of sellers the quantity supplied in the market will be huge but in case of monopoly as he is single seller the supply may be less.

6. Price of other goods:

                                           An increase in the price of other goods make them more profitable so the firm may shift to produce more of that commodity which could lead to less supply of other commodity.

7. Infrastructure Facility:

                                             Infrastructure Facilities in the form of transport, communication etc. leads to a change in the production process and supply.

8. Import and Export:

                                      Exports reduces the supply in the market of the country while Imports increases the supply in the market.

9. Future expectations:

                                         If a seller expect that there will be rise in the price in the future the supply may get affected due to this.

10. Natural Conditions:

                                              The supply of agriculture goods depends upon the natural conditions. If there will be goods climatic condition there will be an increase in the supply of agriculture goods.

Q3. What is Law of Supply and its assumptions and its exceptions?

Ans.

Introduction:

The law of supply was introduced by Prof. Marshall in his book “Principle of Economics” published in the year 1890.

Statement:

According to Prof. Marshall other things remaining constant “The higher the price of a commodity the greater is the quantity supplied and lower the prices of a commodity the smaller is the quantity supplied”.

Explanation:

According to the law the higher the price the greater is the quantity supplied and lower the price of the commodity the smaller will be the quantity supplied. The law shows that price and supply have a direct relation. It can be explained with the help of a table and diagram.

Price	Quantity Supplied
10	20
20	30
30	40
40	50
50	60

   (Diagram in the Book)

It can be clearly seen that higher the price of the commodity larger is quantity supplied. When the prices was 10 the quantity was supplied was 20 units but when price rise to 50 the quantity supplied also increased by 40 unit. This says that supply have a direct relation with price.

Assumptions:

1. Cost of Production remains constant:

                                                                        It is assumed that the cost of production remains the same as a change in the cost of production can lead to a change in the supply.

2. Constant scale of Production:

                                                           It is assumed that there is the constant scale of production for a given period of time.

3. No change in transport cost:

                                                           It is assumed that there is no change in the transport cost as a better transport facility can increase supply at the same rate.

4. No change in technique of production:

                                                                           It is assumed that technique of production remains the same at a given period as a change in technique in production may bring change in the supply.

5. No change in future expectation:

                                                                  It is assumed that there is no change in the future expectation abut prices as a change in future exception may bring a change in the supply of a commodity.

6. No change in Weather Conditions:

                                                                 It is assumed that the weather condition remains the same as the change in weather condition can influence the supply in the market.

7. Government policy remains the constant:

                                                                                It is assumed that the policies made by the government remains the constant as change in policy brings a change in the supply.

8. Price of other goods remains same:

                                                                     It is assumed that the prices of other goods remains the same as prices of other goods also influence the supply of that commodity in the market.

Expectations:

1. Labour Supply:

                                It is an exception to law of supply as when the wage rate of the labour rise he works more that means more hours of work that leads to upward movement of supply curve but further rise in the wage rate does not lead to increase in working hours the labour will prefer leisure than working that means there will be a backward shift of the supply curve. But according to the law the hours of labour should rise so it an exception to supply.

2. Saving:

                 It can be seen that as rate of interest rises the saving rises but some people want regular fixed rate so they save less at higher rate and saving trends to rise with a fall in the interest. Therefore this is an exception to the law.

3. Need for Cash:

                              When the sellers need urgent cash he will supply more goods at lower prices too.

4. Agricultural goods:

                                       The agricultural goods are only produced once in a year and are supplied in the year. If the prices of agricultural goods the supply can’t be raised as they are produced once in a year. But according to the law supply must rise with rise in the price but it is not possible. So agricultural goods are exception to the law.

5. Future Expectation about Prices:

                                                               If a sellers assumes that there will be fall in the price in the near future he will supply more at lower rates.

6. Rare articles:

                               The rise in the price can’t bring change in the supply as there are only one or two.

     

Q4.  What is change in supply and Variation in supply?

Ans:

Change in Supply:

                                When there is increase or decrease in the supply at the constant price due to other factors like cost of production, state of technology etc. There are two types of change in supply.

1. Increase in supply

2. Decrease in supply

1. Increase in Supply:

                                      Increase in supply means the increase in the supply due other factors than price like decrease in cost of production, increase in the infrastructure facilities etc. There is the shift of the supply to the right from the original supply curve to the new supply curve.

(Diagram in the book)

2. Decrease in supply:

                                       Decrease in supply means the increase in the supply due to other factors than price like increase in the cost of production, change in climatic conditions etc. There is the shift of the supply to the left from the original supply curve to the new supply curve.

(Diagram in the book).

Variation in the supply:

When the quantity supplied of the commodity increase of decrease due to change in the price other factors remaining constant. There are two types of Variation in supply.

1. Extension of supply

2. Contraction of supply

1. Extension of supply:

                                         Extension of supply mean the increase in the supply due to rise in the price other factors remaining constant. There is upward shift of the supply curve but along the same supply curve. (Diagram in the book)

2. Contraction of supply:

                                             Contraction of supply mean the decrease in the supply due to decrease in the prices other factors remaining constant. There is the downward shift of the supply curve but along the same demand curve. (Diagram in the book).

Q5. What is concept of Price elasticity of supply and its types?

Ans.

Concept of price elasticity of supply:

                                                                 Price elasticity of supply means the responsiveness of supply due to change in the price only other factor remaining constant. It can be defined as ratio of percentage change in the quantity supplied to percentage change in the price. Symbolically

E(s) = Percentage change in the quantity demanded.

           

           Percentage change in the price.      

E(s) = ∆Q

            Q

 

          ∆P

           P             

             

E(s) = ∆Q       P

           Q         ∆P 

In the Equation

∆Q means change in quantity

Q means original Quantity

∆P means change in price

P means original Price.

Types of Price Elasticity of Supply:

1. Perfectly Elastic Supply:

                                              When a slight change in the price brings an infinite change in the supply then it is said to be perfectly elastic supply. The supply curve is horizontal parallel to X axis. Here the elasticity is infinite (∞). (Diagram in the book).

2. Perfectly Inelastic Supply:

                                                  When there is no change in the supply as the price changes it is called perfectly inelastic supply. The supply curve is vertically parallel to Y axis. Here the elasticity is zero (0). (Diagram in the book).

3. Unitary Elastic Supply:

                                            When the proportionate change in the price lead to proportionate change in supply is said to be unitary elastic supply. Here the elasticity is equal to one (=1). (Diagram in the book).

4. Relatively Elastic Supply:

                                                 When the change in supply is more than the percentage change in price then it is said to be relatively elastic supply. Here the supply curve is flatter. The elasticity of supply is more than one (Es>1). (Diagram in the book).

5. Relatively Inelastic Supply:

                                                     When the change in price is more than the quantity supplied then it is said as relatively inelastic supply. The supply curve is steeper. Here the elasticity is less than one (Es<1). (Diagram in the book).

  

  Q6. Measurement of Price Elasticity of supply.

Ans:  The methods are as follow

1. Percentage Method:

                                         This method is also known as Ratio Method. According to this method elasticity is calculated as ratio of change in quantity supplied to ratio of change in price.

 E(s) = Percentage change in the quantity demanded.

          

           Percentage change in the price.      

E(s) = ∆Q

            Q

 

          ∆P

           P            

            

E(s) = ∆Q       P

           Q         ∆P 

In the Equation

∆Q means change in quantity

Q means original Quantity

∆P means change in price

P means original Price.

If the answer is one then the elasticity is one. If the answer is more than one then the elasticity is more elastic supply. If the answer is less than one then the elasticity is less elastic supply. The elasticity is always positive as there is direct relationship between price and supply.

2. Geometric Method:

                                       This method is also called as Point Method. According to this method we can measure elasticity at a given point on the supply curve. A tangent is drawn to touch X axis at a certain point. Then a perpendicular is drawn.

E(s) = Tangent line intercept on X axis to perpendicular Point

           Quantity supplied at that price.  

Let us discuss some cases of geometric method:

1. More Elastic Supply:

                                          As shown in the diagram given in the textbook the tangent is extended to touch the point beyond X axis. As shown in the diagram NQ is greater than OQ.

E(s) = NQ

           OQ

NQ>OQ therefore Es>1.

2. Less Elastic Supply:

                                        As shown in the diagram given in the textbook the tangent is behind the O point. As shown in the diagram NQ is lesser than OQ.

E(s) = NQ

           OQ

NQ<OQ therefore Es<1.

3. Unitary Elastic Supply:

                                            As shown in the diagram given in the textbook the tangent is on the Point O. As shown in the diagram NQ is equal to OQ.

E(s) = NQ

          OQ

 NQ = OQ therefore Es=1.

Q7. Determinants of Elasticity of Supply.

Ans. The Factors are as follows:

1. Nature of Commodity:

                                             The supply for perishable goods is inelastic and supply for durable goods is elastic.

2. Natural Factor:

                                 The supply for the goods which are depend upon on the natural conditions have inelastic supply.

3. Time Period:

                            In short run the supply is relatively inelastic and in long run it is elastic.

4. Technique of productions:

                                                      If the firm adopts the latest technique then the supply is more elastic and if backward technique is used the supply is less elastic.

5. Scale of Production:

                                         If the goods produced are on a small scale then the supply is relatively inelastic and if the supply is on large scale then supply is elastic.

6. Cost of Production:

                                        If the cost of production is huge then the supply is inelastic and if the cost of production is low then the supply is elastic.

7. Availability of Factors of Productions:

                                                                        If the factors of productions like raw material, labour etc. are easily available then the supply is elastic and if the factors of productions are not easily available then the supply is inelastic.

8. Mobility of factors:

                                      In those industries the mobility is high the supply is elastic.

       

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