(Chapter9) 115

Supply Analysis

Chapter9
Supply Analysis
9.1. SUPPLY ANALYSIS
9.1.1. Introduction
Supply of
Supply refers to the schedule of the quantities of a Goods produced
good or service during in a specific period of time Markets goods
that will be offered for sale at various prices. Thus, Demand for non
supply is defined always at a price and at a specific produced goods
period of time. For example, the price of crude oil is Demand for
changes every day and hence, the supply of crude oil broduced g00ds
is defined on the basis of daily prices. When the
price of a commodity is high then the producer or Supply of non
seller will supply greater amount of the commodity. produced goody
On the other hand when the price of a commodity is Households Firms
low then the producer or seller will supply less Consumption production)y
amount of the commodity. Hence, the price and
amount supplied is positively correlated.

According toThomas, "The supply of goods the

quantity offered for sale in a given market at a given Supply by Demand by
time at various prices". households of S
factors of
firms factors of
Factors Markets production
production
Acording to Meyers, "Supply means the armount
offered for sale at a given price". Figure 9.1: Supply Analysis
Factor of production is supplied by the individuals to the firms. The factor of production is converted into consumable
goods by the firms which is the group of individuals. In the production process, the supply of factor of production
not only on individual's decisions but also it is based on the firms' capability to convert these depends
factors into consumable
goods. The supply of goods which is categorised as non-produced is directly associated with the goods market.
example, banks provides various services such as taking deposits, locker facility and so on, to the For
customers.
9.1.2. Supply Function
Dupply of a good or service is defined under the assumption that if other factor
goods or services which is offered by the seller at various prices at a remaining same then the amount of
specific time
serVices supplied by the seller or producer is not only affected by the price but period. The amount of goods and
such as the prices of other commodities, the price of factors of also affected by the various factors
e level of technology used. The equation which is production, the objectives of producers or sellers and
Supply function can be represented as follows: formed with the use of these factors is called supply function.
S, =f(P, .P,.C, T, 0, F, W, N,T)

9.1.3. Determinants of Supply

Following are the factors that
Price (PJ: If thedetermine
l) the supply:
Product
Is directly other factors remaining constant then the
in the related to the price. Usually, producer amount of goods which is supplied by seller
increases the
becausesituation
when supply of the goods and services to get more profit
of earn higher prices are increases. The producers are encouraged to supply of a goods and services
revenue from sales.
116 (Unit-II) MBA First Semester (Managerial
Economics) TKG
Determinants of Supply

Product Price (P,)

Prices of Related Products (P,)
Costs and Technology (C and T)
Objectives of the Firm (0)
Future Expectations (F)
Weather Conditions and Other
Short-Term Factors (W)
Number of Sellers (N)
Taxation Policy (T)

2) Prices of Related Products (P): Prices of goods related in production

influences firm's to
services. For example, suppose the sellers of pizza notice that the price of hot dogs increases supply goods .
may reduce the amount of resources devoted to the selling of pizza in substantially. Th
favour of hot dogs. This will decrease s
supply of pizza. If the sellers were already selling two (or more) goods,
prompt them to reallocate their resources towards the more profitable ones.the change in market conditions woua
The price of a complementary good is expected to affect the supply of the
manner. For example, if the price of computer hardware increases, other good under consideration in a dire
things remaining
versa. This is due the reason that, an increase inconstant, the sunnl
of software would increase and vice
hardware increases its supply that results in an increase in supply of price of compue.
software.
3) Costs and Technology (Cand T): If two
factors are closely related then they can be treated as
the factors which are used in production
process is known as costs. If other things are remains one. The cost of
increase in factor price increases the cost of the production. In this Constant then any
example, an increase in the price of labour will increase the cost of situation the firm decreases the supply. Far
product is decreases because sellers may charge more than before for production. As a result, the supply of the
unit cost of production or increasing factor any quantity supplied. For reducing the
introduced. Technological improvement reduces productivity technological improvement or innovations are
the total cost and it increases the supply of the
services. product or
4) Objectives of the Firm (0): Firms set
various
of the goods or services which are supplied. Forgoals to achieve. The objective of the firm influences the quantity
then firm supply more amount of goods or example, if the objective of the firm is to maximisation of sales
profit. services in comparison to firm whose objective if
maximisation of
5) Future Expectations (F): As the
by seller's expectatior There aredemand is affected by consumer's expectation, similarly, supply is influenced
various factors such as expectations of prices, costs, sales
macroeconomic conditions which affect and the general
or services will be increase in future thenthe supply. For example, if a seller expects that the price of the goods
he
seller expects that the production cost will be decreases the market supply to gain more profit. Similarly if the
the decrease in profit margin. increased in the future then he increases the market supply to
avod
6) Weather Conditions and Other
affected by the various short-termShort-Term Factors (W): The supply of
factors such as floods, droughts, strikes,goods or services is adversely
refrigerator and air-conditioner has a tendency to lockouts etc. The supply of
other months and there are additional carrying costsincrease in the summer because there are
limited buyers in
the condition of floods and droughts. Supply of of inventory. The supply of agricultural goods is reduced in
and lock-outs. industrial goods is negatively affected in the situation of strikes
7) Nunmber of Sellers (N): The supply of goods or
services is
supply is directly correlated with the number of sellers. If thedirectly
number
affected by the number of sellers. Market
of sellers is high then the market supply
will be greater. In the condition when sellers make a mutual
agreement then they restrict the supply to obtain
more profit. In the condition when there are competition among the seller then they increase the supply to
capture larger market share.
8) Taxation Policy (T): If heavy taxes are imposed on a commodity then the production will be discourages ano
resulting from this the supply willalso be reduces. On the other hand if there are various tax iscounts ae
available then it encourages the producer to increases the supply.
 117
(Chapter9)
SupplyAnalysis
LAW OF SUPPLY
9.2.

Meaning and Definition of Law of Supply this

9.2.1. between price of the commodity and quantity supplied. According to
y o f supply derives the relationship directly related with the price of the commodit.
Tner thing remaining the same, the supply of commodity is
the
quantity supplied or the lower the price, the smaller
nrding to Dooley, "Higher the price the greater the
quantitysupplied"
supplied
the price of commodityincreases then its quantity
Laother words, other thing remaining the samne, when supply can be
also decreases. Symbolically, the law of
ases and when its price decreases, quantity supplied
expressedasfollows:
Sy =f(Px)

9.2.2. Assumptions of the Lawof Supply assumes, other things remains constant. In order to have
of supply also
lust as similar to the law of demand, the law consideration are
quantity supplied, the factors which are taken into
the direct relationship between the price and the
as followS:
constant.
) The prices of factors of production remain
goods etc., remains unchanged.
2) The prices of related goods like substitute
change.
3) The objective of the firms does not future.
change the price of the commodity in the forthcoming
4) There is noexpectation of the producer to
5). The technology remains unchanged.
6) The number of producer do not changes.
in relation topayment of taxes and subsidies.
7) There is no change in the Government policy

9.2.3. Supply Schedule the different

schedule refers to a tabular representation of the quantity supplied and the prices. It shows
Supply different prices.
quantities of a product that the seller is willing to sell at

Supply schedule is divided into two types as follows:

schedule is a schedule showing various quantities of a
1) Individual Supply Schedule: Individual supply consumer at various prices in the market during a
commodity that an individual producer is willing to sell to the
given period of time.
to a schedule which shows various quantities of the
2) Market Supply Schedule: Market supply schedule refers willing to sell to the consumer at various prices
commodity that each and every producer and the firms are
during a specified period of time.
schedules at each price.
Market supply schedule is also said as the summation of all the individual supply
C and by adding these we obtain
For example, there are three individual supply schedules of the firms A, Band
the market supply schedule.
Table 9.1: Market Supply Schedule
P, Supply by the Firm A' Supply by the Firm B Supply by the Firm C' Market Supply
(Units) (Units) (Units)
(Units)
3 2 5+3+2= 10
5
4 9+6+4 = 19
2 6
3 14 8 5 14 +8+5=27
4 10 7 16 + 10+7=33
16
5 11 20 + 12 +1l =43
20 12

9.2.4. Supply Curve

Supply curve refers to the graphical representation of the supply schedule as depictedIin the figure 9.2:

A
 MBA First Semester (Managerial
118 (Unit-IIlI)
Economics) IKIKGPTU
YA Market
S

S S.
X ol X
Supply Supply Supply
(A) (B)
Figure 9.2: Suppl; Curve
Snows the various quantities of a commodity that the producer is willing to sell at different prices in the markes
Supply curve is also divided into two types i.e. individual supply curve and market supply curve. The
the individual supply curves gives the market supply curve as shown in the figure 9.2, the addition of two of all aggregate
supply curve of firm 'A' and firm B'
the direct relationship between the gives the market and
individual
supply curve SS. As a result, the market supply curve depicts
quantity supplied the price of the commodity. As the price
quantity supplied by every firm also increases hence, the supply curve is upward sloping from left to right. increases,
the
9.2.5. Why does the Supply Curve Slopes upwards to the Right?
The increase in prices allows the producer to make further profits for the
firm. When the other things remaine
Constant, the direct relationship between price and quantity supplied leads to emergence
Various causes for the upward sloping of the supply curve which are as of some situations. There ara
1) Change in Stock: As there is positive relationship follows:
between supply and the price, therefore, with increase in
price, the quantity supply of the old stock also increases and vice-versa. This result
with the rise in prices. into the increase in inventory
2) Profit and Loss: Normally, with increase in price the
profits and the
Alternatively, with reduction in the prices the supply of the firm reduces production
and it
of the firm also increases
results in losses for the firm and
loss of confidence among the producer who makes the decision to
produce smaller quantities. Hence, the cost of
production is reduced considerably.
3) Entry and Exit of the Firms: The increased price with
industry which results into rise in supply. In the situation ofincreased profits encourages new firms to join the
loss, the existing firms try to move out from the
industry which leads to reduction in supply because the producer who
profit in the market at reduced prices. Hence, the supply curve slopes are not efficient do not expect to earn any
upward from left to right.
4) Incentive for Innovation: Nowadays, the
scientific researcher uses modern technology for the production
process which results into the positive effects.

9.2.6. Exception to the Law of Supply

There are various exceptions to the law of supply which are as follows:
1) Funture Expectation About The Change In
Prices: In case the producer assumes that the prices in future will
reduce then he will increase the supply even though there is fall in the prices of the commodity. Hence, to
eliminate the future losses the supplier sells the product even at reduced
prices.
2) Increase of Agricultural Goods: The supply of
rather it is controlled by the rainfall, fertility of the agricultural goods is not affected by the prices of the go0u
land and weather conditions.
3) Perishable Goods: Perishable goods refer to the goods
which must be used
fruits, vegetables, milk etc. Hence, as these goods cannot be stored for long withina shorter period of time
period of time. Thus, the proauc
supplies the goods even when there is fall in the price of the commodity.
4) Goods of Action: The goods which are smaller in quantity are
case, the law of supply does not hold true.
purchased during a given period of tme.
5) Disposal of Old Stock: In order to clear the reserved stock the seller sells the goods without
the prices of the commodity. "There is no profit from the money which is concerning «
invested in the reserved stock.
Rare Goods: The goods which are rare like old coins, artistic goods and rare poems have unusual prices inspite
6)
of having less supply. The consumer who purchases these goods is not affected by the change in prices.
) Backward Countries: Backward countries do not have adequate capital and the required inputs which are ussed
for the production process i.e. with increase in the prices the capability of the producer and the quantity supply
remains same.
 (Chapter9) 119
SupplyAnalysis

9.3. ELASTICITY OF SUPPLY

03.1. Meaning of Elasticity of Supply quantity of supply with respect to change in the price.
ilustrates the tendency of change in the
ticity of Supply supply also increases or decreases. This change
emeans that with the increase or decrease in price, the quantity of this amount of change in the
quantity of supply can be measured using Price Elasticity of Supply. However,
inthe has no accurate measurement.
Supplydue tothe change in price
of the degree of responsiveness of supply to
Aocording to Samuelson, "Elasticity of supply is defined as a measure
price".
the change in
percentage change in quantity divided by percentage
Aocording to Prof. Bilas, Elasticity of supply is defined as theratioof proportionalchange in quantity supplied to the
the
change in price". Elasticity of supply may be described as
proportional change in price.
Proportional change in supply Percentage change in quantity supplied
Elasticity of Supply Proportional change in price Percentage changein price
AS P-P
P AS P
S
AP S-S, APS
P S

where, E. S.= Elasticity of supply; AS = Change in supply

S= Original/lnitial supply; AP= Change in price
P= Original/Initial price; P=New price
S = New quantity of supplied
similar. The only
Elasticity of Demand and Elasticity of Supply are quite
When comparison is done, one can find that since it holds a direct relationship between price and
difference is that Elasticity of Supply will show a positive sign
supplied quantity.
9.3.2. Determinants of Elasticity of Supply
Following are determinants of Elasticity of Supply: the
greatly depends upon the nature of inputs used during
1) Nature of Inputs Used: Elasticity of Supply non-specialised increased
nature, their volume of supply can be
production of the product. In case of elements of
of such products is high. However, in case of elements of
casily, which means the Elasticity of Supply their Elasticity of Supply is low.
specialised nature, their volume of supply cannot be increased; hence
as agriculture based raw materials, the elasticity of
2) Natural Constraints: In case of the product which is used is itself dependent on the climatic conditions of
Supply will be low because production of such raw materials natural constraints.
nature. Hence, Elasticity of Supply is also determined by the
risk-taking ability regarding the bulk production of
) Risk-Taking: When the producer of the products has high high.
products, than the Elasticity of Supply of such products is Whereas if the producer is not willing to take
Tisk, then Elasticity of Supply of such products will be low.
also determines the Elasticity of
) Nature of the Commodity: The nature of product which is being suppliedtime period is not possible which
Supply. If the products are of perishable nature, than storing it for long
for quite a longer time
decreases its Elasticity of Supply. However, products of durable nature can be stored
period, hence they have more elasticity.
5) LawS of Production: The various laws of production play an important role in determining the Elasticity of
high.
Supply. Wherever Law of increasing returns is being applied, there the Elasticity of Supply will be
However, in case of Law of Diminishing Returns, the Elasticity of supply will be limited.
its Elasticity. More elaboratey t
G involved time period is longer in supply of product then more will be whereas
will be more in case of short-rull
BIat Case or long-run production, the Elasticity of Supply
Elasticity of Supply will be les.
120 (Unit-III) MBA First Semester (Managerial
Economics)
7) Techniques
capital,
of Production: n case where complex techniques of production involving specialised
etc. are used, there the Elasticity of supply will be quite low. Whereas, in case of simple production
IKGPTU
1abour, more
8)
en uses minimum capital and unskilled labous, will havebetter chances of higher Elasticity of Supply.
Nature of
manufacturedIndustry: Elasticity
by the cottage
of Supply is also determined by the nature of industry, that is ttheechnique
industries or small firms will have comparatively less Elasticity of Supply
Products that have been manufactured by the big firms or industries will have more Elasticity of Supply. product
9.3.3. Degreesofof Price Elasticity of Supply
However.,
There are five degrees price
Perfectly Elastic Supply: elasticity Perfectly Elastic
1) of supply which are as follows: (*)
Price
In case of perfectly elastic supply, the supply of P.E.S. =
the product increasesor h S S
decreases, the price
undergoing nominal change. For example, the remainingbelow
the Same O
table shows the
changes in quantity of supply, price remaining
Table 9.2: Perfectly Elastic Supply constant.
Price () Schedule
10 Supply
8 Q Q
10
10 Quantity
Figure 9.3: Perfectly Elastic Supply
Figure 9.3, shows supply curve SS which is parallel to
is X-axis (OX). This
applicable in productions where Law of constant returns is being operative.
Here, the quantity supplied is zero as well as O0,
therefore, P.E.S. = o, and O0, at the price OS and since, the price remains constant
2) Perfectly Inelastic -U
is no Supply: In case of perfectly inelastic supply, there Y
change in the quantity of supply with respect to any (7)
Price
price of the product. There are very few products which falls change in
under this P;
Perfectly
category. The table given below can be used as an example, inelastic
P.E.S. =0
P
Table 9.3: Perfectly Inelastic Supply
Price () Schedule
Supply
S X
10
Figure 9.4:
Quantity
Figure 9.4 shows supply curve SS which is parallel to Perfectly Inelastic Supply
means there is no change in the supply of quantity at Y-axis (OY) and is touching point S on X-axis which
this point.
Here, the price may be zero or OP or OP; but the
will remain OS, hence, P.E.S. =0. quantity of supply
Elastic Unitary Supply S
3) Unitary Elasticity: In Unitary (7
PriceP
Elasticity, change in the quantity of supply
is directly proporional to the change
A
in the price of the product. This can
be illustrated with the example that, if
there is
product by 30% then its supply will also increase byincrease
in price of a
30%.
Table 9.4: Unitary Elasticity Schedule X
Price () S S,
Supply (Unit) Quantity
10 20
15 30
Figure 9.5: Unitary Elasticity Supply
Figure 9.5 shows Supply curve SS which illustrates
change in price PP, is equal to proportionate proportionate Y

supplied SS change in quantity ()

PriceP
Relatively
4) More than Unitary (Relatively Elastic): In case of P inelastic
elastic, the proportionate change in the quantity relatively
of supply is
comparatively more than the proportionate change in the price.
Example for this can be illustrated by the table given below.
S
Table 9.5: Relatively Elastic Supply Schedule Quantity
Price () Supply (Unit)
10 10 Figure 9.6: Relatively Elastic Supp!y
15 12
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SupplyAnalysis
proportionate change in price PP, is less than the
re 9.6 shows supply curve SS which illustrates that the
proportionate change in quantity supplied SS.
Supply: In case of More elastic supply
Relatively Inelastic (Less than Ünitary) A
change in the quantity of
relatively Inelastic, the proportionate proportionate
PË
change in the INA ()
supply is comparatively less than the by the table given below. P

nrice. Example for this can be illustrated

Table 9.6 Less than Unitary
Supply Schedule S Si
X
Price () Supply (Unit) Quantity
10
Figure 9.7: Relatively Inelastic Supply
20
15
has
price, P to P;, is more than the change in supply (S, S). The supply curve SS
In figure 9.7, the change in
elasticity of supply.
more steepness showing less
Table 9.7: Different Price Elasticities of Supply Relation
Degrees of Elasticity
Value or Elasticity of Supply Perfectly inelastic Change in price has no affect on supply
Eg =0 AS AP
E_ < 1 Less than unitary
P
Unitary elastic AS AP
E_ = 1 P

More elastic AS AP
E >1
S P
(Infinite) Perfectly elastic Supply changes without change in price
E= o

in Managerial Decision-Making
9.3.4. Use of Elasticity of Supply decision-making for various businessmen and producers in following
ways:
Elasticity of Supply is useful in managerial however, price is greatly influenced
supply helps in determination of prices, elasticity of supply is less which
1) Determining Prices: Elasticity ofproduction. In case of short-run production, the
by total time involved in the Whereas in case of long-run production, the chance of change in supply is more,
leads to increase in the prices.
giving chances to decrease the prices. economists have
of supply also helps in determining factor pricing. Modern illustrates that the
2) Factor Pricing: Elasticity production. It
concept of rent which depends on the elasticity of factors of case of common
developed the inelastic or limited supply. However, in
they have
specialised factor will get more rent since
supply, rent paid will be comparatively less.
factors of production having more elasticity of comparatively low
Taxation: It can be used in determining the amount of tax to be charged, i.e., products having
undergo less changes.
3)
Supply can be allocated high taxation charges because supply of such products will
Elasticity of

9.4. EXERCISE

9.4,1. Short Answer Type Questions

1) Explain supply function.
2) Highlight the assumptions of law of supply.
3) State the exceptions of law of supply.
4) What is elasticity of supply?
) Highlight the factors determining the elasticity of supply.
0) How elasticity of supply is important? Discuss.

9.4.2. Long Answer Type Questions

)What is supply? Explain the factors determining supPply.
What is law of supply? Explain supply schedule and supply curve. law of supply?
ydoes the supply curve slopes upwards to the right? What are the exceptions to the
Detine elasticity of supply. Discuss the price elasticity of supply.