BEFA Dr.Srikrishna.

UNIT-II
Demand and Supply Analysis

Elasticity of demand
Elasticity of demand explains the relationship between a change in price and consequent change
in amount demanded. “Marshall” introduced the concept of elasticity of demand. Elasticity of
demand shows the extent of change in quantity demanded to a change in price.
In the words of “Marshall”, “The elasticity of demand in a market is great or small according as
the amount demanded increases much or little for a given fall in the price and diminishes much
or little for a given rise in Price”
Elastic demand: A small change in price may lead to a great change in quantity demanded. In
this case, demand is elastic.
In-elastic demand: If a big change in price is followed by a small change in demanded then the
demand in “inelastic”.

 Types of Elasticity of Demand:

There are three types of elasticity of demand:
1. Price elasticity of demand

2. Income elasticity of demand

3. Cross elasticity of demand

4. Advertising elasticity of demand

1. Price elasticity of demand:

Marshall was the first economist to define price elasticity of demand. Price elasticity of demand
measures changes in quantity demand to a change in Price. It is the ratio of percentage change in
quantity demanded to a percentage change in price.

Proportionate change in the quantity demand of commodity

Price elasticity = ------------------------------------------------------------------

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Proportionate change in the price of commodity

Edp = (Q2 - Q1) / Q1

(P2 - P1) / P1

There are five cases of price elasticity of demand

A. Perfectly elastic demand: When small change in price leads to an infinitely large change is
quantity demand, it is called perfectly or infinitely elastic demand. In this case E=∞

The demand curve DD1 is horizontal straight line. It shows the at “OP” price any amount is
demand and if price increases, the consumer will not purchase the commodity.

B. Perfectly Inelastic Demand: In this case, even a large change in price fails to bring about a
change in quantity demanded.

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When price increases from ‘OP’ to ‘OP’, the quantity demanded remains the same. In other
words the response of demand to a change in Price is nil. In this case ‘E’=0.

C. Relatively elastic demand: Demand changes more than proportionately to a change in price.
i.e. a small change in price loads to a very big change in the quantity demanded. In this case E >
1. This demand curve will be flatter.

When price falls from ‘OP’ to ‘OP’, amount demanded increase from “OQ’ to “OQ1’ which is
larger than the change in price.
D. Relatively in-elastic demand: Quantity demanded changes less than proportional to a change
in price. A large change in price leads to small change in amount demanded. Here E < 1.
Demanded carve will be steeper.

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When price falls from “OP’ to ‘OP1 amount demanded increases from OQ to OQ1, which is
smaller than the change in price.

E. Unit elasticity of demand: The change in demand is exactly equal to the change in price.
When both are equal E=1 and elasticity if said to be unitary.

When price falls from ‘OP’ to ‘OP1’ quantity demanded increases from ‘OP’ to ‘OP1’, quantity
demanded increases from ‘OQ’ to ‘OQ1’. Thus a change in price has resulted in an equal change
in quantity demanded so price elasticity of demand is equal to unity.

2. Income elasticity of demand:

Income elasticity of demand shows the change in quantity demanded as a result of a change in
income. Income elasticity of demand may be slated in the form of a formula.

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Proportionate change in the quantity demand of commodity

Income Elasticity = ------------------------------------------------------------------
Proportionate change in the income of the people

Income elasticity of demand can be classified in to five types.

A. Zero income elasticity: Quantity demanded remains the same, even though money
income increases. Symbolically, it can be expressed as Ey=0. It can be depicted in the
following way:

As income increases from OY to OY1, quantity demanded never changes.

B. Negative Income elasticity: When income increases, quantity demanded falls. In this case,
income elasticity of demand is negative. i.e., Ey < 0.

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When income increases from OY to OY1, demand falls from OQ to OQ1.

C. Unit income elasticity: When an increase in income brings about a proportionate increase in
quantity demanded, and then income elasticity of demand is equal to one. Ey = 1

When income increases from OY to OY1, Quantity demanded also increases from OQ to OQ1.

D. Income elasticity greater than unity: In this case, an increase in come brings about a more
than proportionate increase in quantity demanded. Symbolically it can be written as Ey > 1.

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It shows high-income elasticity of demand. When income increases from OY to OY1, Quantity
demanded increases from OQ to OQ1.

E. Income elasticity leas than unity: When income increases quantity demanded also increases
but less than proportionately. In this case E < 1.

An increase in income from OY to OY, brings what an increase in quantity demanded from OQ
to OQ1, But the increase in quantity demanded is smaller than the increase in income. Hence,
income elasticity of demand is less than one.

3. Cross elasticity of Demand:

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A change in the price of one commodity leads to a change in the quantity demanded of another
commodity. This is called a cross elasticity of demand. The formula for cross elasticity of
demand is:
Proportionate change in the quantity demand of commodity “X”
Cross elasticity = -----------------------------------------------------------------------
Proportionate change in the price of commodity “Y”

a. In case of substitutes, cross elasticity of demand is positive. Eg: Coffee and Tea
When the price of coffee increases, Quantity demanded of tea increases. Both are substitutes.

b. In case of compliments, cross elasticity is negative. If increase in the price of one

commodity leads to a decrease in the quantity demanded of another and vice versa.

When price of car goes up from OP to OP!, the quantity demanded of petrol decreases from OQ
to OQ!. The cross-demanded curve has negative slope.

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C. In case of unrelated commodities, cross elasticity of demanded is zero. A change in the price
of one commodity will not affect the quantity demanded of another.

Quantity demanded of commodity “b” remains unchanged due to a change in the price of ‘A’,
as both are unrelated goods.

4. Advertising Elasticity:
It refers to increase in the sales revenue because of change in the advertising expenditure. In
other words, there is a direct relationship between the amount of many spent on adverting and its
impact on sales. Adverting elasticity is always positive.

Advertising elasticity = Proportionate changes in unity demand for product X

Proportionate change in advertisement cost.
The same is expressed as Eda = (Q2 – Q1) Q1
(A2-A1) A1
Where
Q1 is the quantity demanded before change
Q2 is the quantity demanded after change
A1 is the amount spent on advertising before change
A2 is the amount spent on advertising after change

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 LAW OF DEMAND

The consumer’s decisions are guided by several elements, such as price, income, tastes and
preferences etc. Among the many causal factors affecting demand, price is the most significant
and the price- quantity relationship called as the Law of Demand is stated as follows:
“The greater the amount to be sold, the smaller must be the price at which it is offered in order
that it may find purchasers, or in other words, the amount demanded increases with a fall in price
and diminishes with a rise in price”. In simple words other things being equal, quantity
demanded will be more at a lower price than at higher price. The law assumes the income, taste,
fashion, prices of related goods, etc. remain the same in a given period.
The law indicates the inverse relation between the price of a commodity and its quantity
demanded in the market.

Thus ‘Ceteris Paribus’;

 With a change in the price of the good, the consumer changes the quantity purchased by
him. Normally, the consumer buys more of a good when its price falls and reduces the
quantity when its price increases.
 The quantity demanded must be related to the time interval over which it is purchased.
For example, it is meaningless to say that a consumer buys 5 kg of sugar when its price is
Rs. 12 per kg. The quantity bought must specify the time period, i.e., per day, per week,
per month, or over some other period.
 Factors determining demand for a commodity are: Price, Income of the consumer, Tastes
& Preferences,
 Demographic factors, Seasonal factors etc.

 Factors influencing the elasticity of demand

Elasticity of demand depends on many factors.
1. Nature of commodity: Elasticity or in-elasticity of demand depends on the nature of the
commodity i.e. whether a commodity is a necessity, comfort or luxury, normally; the demand for
Necessaries like salt, rice etc is inelastic. On the other band, the demand for comforts and
luxuries is elastic.

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2. Availability of substitutes: Elasticity of demand depends on availability or non-availability of

substitutes. In case of commodities, which have substitutes, demand is elastic, but in case of
commodities, which have no substitutes, demand is in elastic.

3. Variety of uses: If a commodity can be used for several purposes, than it will have elastic
demand. i.e. electricity. On the other hand, demanded is inelastic for commodities, which can be
put to only one use.

4. Postponement of demand: If the consumption of a commodity can be postponed, than it will

have elastic demand. On the contrary, if the demand for a commodity cannot be postpones, than
demand is in elastic.
The demand for rice or medicine cannot be postponed, while the demand for Cycle or umbrella
can be postponed.

5. Amount of money spent: Elasticity of demand depends on the amount of money spent on the
commodity. If the consumer spends a smaller for example a consumer spends a little amount on
salt and matchboxes. Even when price of salt or matchbox goes up, demanded will not fall.
Therefore, demand is in case of clothing a consumer spends a large proportion of his income and
an increase in price will reduce his demand for clothing. So the demand is elastic.

6. Time: Elasticity of demand varies with time. Generally, demand is inelastic during short
period and elastic during the long period. Demand is inelastic during short period because the
consumers do not have enough time to know about the change is price. Even if they are aware of
the price change, they may not immediately switch over to a new commodity, as they are
accustomed to the old commodity.

7. Range of Prices: Range of prices exerts an important influence on elasticity of demand. At a

very high price, demand is inelastic because a slight fall in price will not induce the people buy
more. Similarly at a low price also demand is inelastic. This is because at a low price all those
who want to buy the commodity would have bought it and a further fall in price will not increase
the demand. Therefore, elasticity is low at very him and very low prices.

 Elasticity of Demand in decision making

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For taking decisions on a pricing policy, the businessman has to know the likely effects of price
changes on the demand for his product in the market. He can calculate if the demand will
increase by lowering of the price and to what extent, and whether it will result in substantial
increase in revenue and profits. Some businessmen do not pay any attention to the aspect of
elasticity of demand, and suffer heavy losses by wrong decisions. In scientific management
decision making, one has to have as precise an idea as possible of the degree of elasticity of
demand. By knowing the type of elasticity, it is possible to fix the precise price of the product in
a very profitable way. Unitary elastic demand will not bring in more revenue. Demand elasticity
being more than unity, a price cut would lead to increase in revenue. If the product has inelastic
demand, raising price will fetch better revenue and profits.

 Importance of Elasticity of Demand:

The concept of elasticity of demand is of much practical importance.

1. Price fixation: Each seller under monopoly and imperfect competition has to take into
account elasticity of demand while fixing the price for his product. If the demand for the product
is inelastic, he can fix a higher price.

2. Production: Producers generally decide their production level on the basis of demand for the
product. Hence elasticity of demand helps the producers to take correct decision regarding the
level of cut put to be produced.

3. Distribution: Elasticity of demand also helps in the determination of rewards for factors of
production. For example, if the demand for labour is inelastic, trade unions will be successful in
raising wages. It is applicable to other factors of production.

4. International Trade: Elasticity of demand helps in finding out the terms of trade between
two countries. Terms of trade refers to the rate at which domestic commodity is exchanged for
foreign commodities. Terms of trade depends upon the elasticity of demand of the two countries
for each other goods.

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5. Public Finance: Elasticity of demand helps the government in formulating tax policies. For
example, for imposing tax on a commodity, the Finance Minister has to take into account the
elasticity of demand.

6. Nationalization: The concept of elasticity of demand enables the government to decide about
nationalization of industries.

Demand Forecasting

Introduction:
The information about the future is essential for both new firms and those planning to expand the
scale of their production. Demand forecasting refers to an estimate of future demand for the
product.
It is an ‘objective assessment of the future course of demand”. In recent times, forecasting plays
an important role in business decision-making. Demand forecasting has an important influence
on production planning. It is essential for a firm to produce the required quantities at the right
time.
It is essential to distinguish between forecasts of demand and forecasts of sales. Sales forecast is
important for estimating revenue cash requirements and expenses. Demand forecasts relate to
production, inventory control, timing, reliability of forecast etc. However, there is not much
difference between these two terms.

 TYPES OF DEMAND FORECASTING:

Based on the time span and planning requirements of business firms, demand forecasting can be
classified in to

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1. Short-term demand forecasting and

2. Long – term demand forecasting

1. Short-term demand forecasting: Short-term demand forecasting is limited to short periods,

usually for one year. It relates to policies regarding sales, purchase, price and finances. It refers
to existing production capacity of the firm. Short-term forecasting is essential for formulating is
essential for formulating a suitable price policy. If the business people expect of rise in the prices
of raw materials of shortages, they may buy early. This price forecasting helps in sale policy
formulation. Production may be undertaken based on expected sales and not on actual sales.
Further, demand forecasting assists in financial forecasting also. Prior information about
production and sales is essential to provide additional funds on reasonable terms.

2. Long – term forecasting: In long-term forecasting, the businessmen should now about the
long-term demand for the product. Planning of a new plant or expansion of an existing unit
depends on long-term demand. Similarly a multi product firm must take into account the demand
for different items. When forecast are mode covering long periods, the probability of error is
high. It is very difficult to forecast the production, the trend of prices and the nature of
competition. Hence quality and competent forecasts are essential.

Prof. C. I. Savage and T.R. Small classify demand forecasting into time types. They are 1.
Economic forecasting, 2. Industry forecasting,3. Firm level forecasting. Economic forecasting is
concerned with the economics, while industrial level forecasting is used for inter-industry
comparisons and is being supplied by trade association or chamber of commerce. Firm level
forecasting relates to individual firm.

 Characteristics of good demand forecasting

A forecast is said to be successful when the excepted demand is equal to the actual demand.
This can only be possible if the right method of demand forecasting is selected.
i. Accuracy: Accuracy implies that an organization should make forecasts close to real figures,
so that the real picture of demand can be determined. For example, there would be an increase in

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sales in the coming years is an inaccurate forecast. On the other hand, there would be an increase
in sales by 30% in the next year is an accurate forecast.
ii. Durability: Implies that forecasts should be done in such a way that they can be used for long
periods as forecasts involves a lot of time, money, and efforts.
iii. Flexibility: Flexibility implies that the forecasts should be adjustable and adaptable to
changes. In today’s uncertain business environment, there is a rapid change in the tastes and
preferences of consumers, which affect the demand for products. Therefore, the demand
forecasts made by an organization should reflect those changes. Apart from this, an organization,
while making forecasts, should consider various business risks that may take place in the future.
iv. Acceptability: Acceptability Refers to one of the most important criterion of demand
forecasting. An organization should forecast its demand by using simple and easy methods. In
addition, the methods should be such that organizations do not face any complexities. However,
organizations generally prefer advanced statistical methods, which may prove difficult and
complex.
v. Availability: Availability implies that adequate and up-to-date data should be available for
forecasts. The forecasts should be done in timely manner so that necessary arrangements should
be made related to the market demand.
vi. Plausibility: Plausibility implies that the demand forecasts should be reasonable, so that they
are easily understood by individuals who are using it.
vii. Economy: Economy implies demand forecasting should be economically effective. The
forecasting should be done in such a manner that the costs should be minimized and benefits
should be maximized.

 Steps in demand forecasting

Determining the objectives

Deciding the Time horizon

Selecting the appropriate method

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Collection and analysis of data

Prepare a Report

Evaluation and adjustments of Reports at regular

 METHODS OF DEMAND FORECASTING

Forecasting demand is not an easy exercise. It may be easy only in the case of a very few
products or services. Where the demand for the product does not change from time to time or
competition is not significant, it may be relatively easy to forecast demand for a particular
product or service. In a majority of the cases, market demand in general and company demand in
particular change from year to year. In such a case, the determining factor for marketing success
is only a good forecasting technique. The more the demand is sensitive, the more important it is
to forecast it accurately. This calls for an elaborate forecasting process.
There are many methods of forecasting demand. To forecast demand, we need to build a certain
base of information. To build such an information base, we need to consider what the customers
say, what the customers do, and how the customers behaved in a given marketing situation.
The different methods of forecasting demand can be grouped under (a) survey methods and (b)
statistical methods.

1. Survey methods
a. Survey of buyer intentions
i. Census method
ii. Sample method

b. Sales force opinion method

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2. Statistical methods
a. Trend projection method
i. Trend line by observation

ii. Least square method

iii. Time series analysis

iv. Moving averages method

v. Exponential smoothing

c. Barometric techniques

d. Simultaneous equations method

e. Correlation and regression methods

3. Other methods
a. Expert opinion method

b. Test marketing

c. Controlled experiments

d. Judgments approach

1. Survey Methods
a) Survey of Buyers Intentions: TO anticipate what buyers are likely to do under a given set of
circumstances? A most useful source of information would be the buyers themselves. It is better
to draw a list of all potential buyers, approach each buyer to ask how much does he plans to buy
of the given product at a given point of time under particular conditions. This is the most
effective method because the buyer is the ultimate decision maker and we are collecting the
information directly from him.
The survey of buyers can be conducted either by covering the population or by selecting a
sample group of buyers. Suppose there are 10,000 buyers for a particular product. If the company

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wishes to elicit the opinion of all the buyers. This method is called census method or total
enumeration method.
This method is not only time consuming, but also costly. On the other hand, the firm can select a
group of buyers who can represent the whole population. This method is called the sample
method. A survey of buyers based on sample basis can be completed faster with relatively lower
costs.
There are professional organizations specialized in market research on behalf of the firms who
wish to forecast the demand for their products and /or services. Normally, a questionnaire is
designed to elicit the information. The data thus collected forms the information base to design
the consumer profiles. These consumer profiles guide the firms to identify the factors that
influence demand. Also they may enable the firms to strengthen their weak areas of operation
and to refocus their marketing strategy. Specialized organisation such as the ORG Marg. And
others conduct consumer surveys on large scale and offer necessary market intelligence.
Surveys of this nature focus directly on the consumer requirements and their behaviour. They
look more simple and easy to be administered when compared to other statistical techniques such
as trend analysis and econometric methods such as regression analysis.
b) Sales Force Opinion method: Sales Force Opinions Another source of getting reliable
information about the possible level of sales or demand for a given product or service is the
group of people who sell the same. Thus, we can control the limitations of cost and delays in
contacting the customers.
The sales people are those who are in constant touch with the main and large buyers of a
particular market, and hence they constitute another valid source of information about the likely
sales of a product. The sales force is capable of assessing the likely reactions of the customers of
their territories quickly, given the company’s marketing strategy; it is less costly as the survey
can be conducted instantaneously through telephone, fax or video conferencing, and so on. The
data, thus collected, forms another valid source of reliable information.

Here also, there is a danger that salesman may sometimes become biased in their views. The
sales people are paid based on their results. Where the targets are set based on the results of the
survey of the sales force, and the payment is linked to achievement of these targets, incentive is
paid to those who achieve more than their targets. To prevent the company from fixing higher

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targets, it is quite likely that they understate or overstate the demand to eventually get how or
high sales quota set for them.

2. Statistical Methods: For forecasting the demand for goods and services in the long run,
statistical and mathematical methods are used considering the past data.

a) Trend Projection Methods: These are generally based on analysis of past sales patterns.
These methods dispense with the need for costly market research because the necessary
information is often already available in company files in terms of different time periods, that is,
a time series data. There are five main techniques of mechanical extra pollution. In extrapolation,
it is assumed that existing trend will maintain all through.

i) Trend line by observation: This method of forecasting trend is elementary, easy and quick as
it involves merely the plotting the actual sales data on a chart and then estimating just by
observation where the trend line lies. The line can be extended towards a future period and
corresponding sales forecast read from the graph.

ii) Least Squares Method: Certain statistical formulae are used here to find the trend line which
‘best fits’ the available data. The trend line is the basis to extrapolate the line for future demand
for the given product or service on graph. Here it is assumed that there is a proportion change in
sales over a period of time. In such a case the trend line equation is in linear form. Where this
assumption does not hold a good, the equation can be in non linear form.

The estimating linear trend equation of sales is written as:

S=x+y(T)
Where x and y have been calculated from past data S is sales and T is the year number for which
the forecast is made. To find the values of x and y, the following normal equations have to be
stated and solved:
Where
S is the sales;
T is the year number,
n= number of years

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iii) Time series analysis: Where the surveys or market tests are costly and time consuming,
statistical and mathematical analysis of past sales data offers another method to prepare the
forecasts, that is, time series analysis. One major requirement to administer this technique is that
the product should have actively been traded in the market for quite some time in the past. In
other words, considerable data on the performance of the product or service over significantly
large period should be available for better results under this method. Time series emerge from
such a data when arranged chronologically .Given significantly large data, the cause and effect
relationships can be discovered through quantitative analysis.

iv) Moving average method: This method considers that the average of past events determines
the future events. In other words, this method provides consistent results when the past events
are consistent and unaffected by wide changes. AS the name itself suggests, under this method,
the average keeps on moving depending up on the number of years selected. Selection of the
number of years is the decisive factor in this method. Moving averages get updated as new
information flows in.
This method is easy to compute. One major advantage with this method is that the old data CAN
be dispensed with, once the averages are computed. These averages, not the original data, are
further used as the forecast for next period.
v) Exponential smoothing: This is a more popular technique used for short run forecasts. This
method is an improvement over moving averages method. Unlike in moving averages method,
all time periods here are given varying weights, that is m the values of the given variable in the
recent times are given higher weights and the values of the given variable in the distant past are
given relatively lower weights for further processing.

The formula used for exponential smoothing is

St+1 = cSt + (1-c)Smt
Where
St+1 is exponentially smoothed average for nw year
St is actual data in the most recent past
Smt is most recent smoothed forecast
c is smoothing constant

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If the smoothing constant ‘c’ is higher, higher weight is given to the most recent information.
The value of ‘c’ varies between 0 and 1 inclusive and the exact value of c is determined by the
magnitude of random variations. If the magnitude of random variations is large, lower value to c
is assigned and vice versa.

b) Barometric Techniques: Where forecasting base d on time series analysis or extrapolation

may not yield significant results, barometric techniques can be made use of. Under the
barometric technique, one set of data is used to predict another set . In other words, to forecast
demand for a particular product or service, use some other relevant indicator of future demand.
c) Simultaneous equation method:In this method, all variables are simultaneously considered,
with the conviction that every variable influences the other variable in an economic environment.
Hence, the set of equationsequal the no of dependent (controllable) variable which is also called
endogenous variable. In other words, it is a system of ‘n’ equations with ‘n’ unknowns. It can be
solved; the moment of the model is specified because it covers the entire unknown variable it is
also called complete system approach to demand forecasting.
d) Correlation and regression methods: Correlation and regression methods are statistical
techniques. Correlation describes the degree of association of between two variables such as
sales and advertisement expenditure. When the two variables tend to change together, then they
are set to be correlated. The extent to which they are correlated is measured by correlation
coefficient. Of these two variables, one is a dependent variable and another is the independent
variable. If the high vales of one variable are associated with the high value of another, they are
set to be positively correlated. Correlation coefficient ranges between +1 and -1. It does not
exceed this range. Where the correlation coefficient is zero, it indicates that the variables under
the study are not related at all.

In regression analysis, an equitation is estimated which best fits in the sets of observations of
depended variables and independent variables.

3) OTHER METHODS
a) Expert Opinion: Well informed persons are called experts. Experts constitutes at another
source of information. These persons are generally the outside experts and they do not have any

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vested interests in the results of a particular survey. An experts is good at forecasting and
analyzing the feature trends in a given product or service at a given level of technology.

b) Test marketing: It is likely that opinions given by buyers, sales man or other expert may be,
at times, misleading. This is the reason why most of the manufacturers favor to test their product
or service in limited market as test run before they launch their product nationwide.

c) Controlled Experiments: Controlled experiments refer to such exercises where some of the
major determinants of demand are manipulated to suit to the customers with the different tastes
and preferences, income groups, and such others. It is further assumed that all other factor
remain the same. In this method, the product is introduced with different packages, different
prices in different markets or same markets to assess which combination appeals to the customer
most.
d) Judgmental approach: When none of the above methods are directly related to the given
product or service, the management has no alternative other than using its own judgment.

Supply Analysis

Supply represents how much the market can offer. The quantity supplied refers to the amount of
a good producers are willing to supply when receiving a certain price. The supply of a good or
service refers to the quantities of that good or service that producers are prepared to offer for sale
at a set of prices over a period of time.
According to Watson, Supply means a schedule of possible prices and amounts that would be
sold at each price. The supply is not the same concept as the stock of something in existence, for
example, the stock of commodity X in Delhi means the total quantity of Commodity X in
existence at a point of time; whereas, the supply of commodity X in Delhi means the quantity
actually being offered for sale, in the market, over a specified period of time.

 Determinants of Supply
It is relevant to know the factors which determine supply of a product.

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1. Price of the commodity: If the prices are high, the sellers are willing to supply more goods to
increase total revenue ultimately increasing their profit.
2. Cost of Production: Cost depends on the price of factors. Increase in factor cost increases the
cost of production, and reduces supply.
3. State of Technology: Use of advanced technology increases productivity of the organization
and increases its supply.
4. Number of Firms: With the increase in number of producers of a particular product, the
supply of the product in the market will increase. If entry is unrestricted, new firms will continue
to enter the market, thus increasing supply and degree of competition. It results in decrease in
supply of product by an individual firm.
5. Government Policies: Government policies related to taxes and subsidies on certain products
also have an effect on supply.

 Supply Function
A supply function of an individual supplier is an algebraic form of expressing his behavior with
regard to what he offers in market at the prevailing prices. In it, the quantity supplied per period
of time is expressed as a function of several variables. General form of the supply function is
Sx = f (Px, Cx, Tx, G, N)

 Law of Supply
The law of supply states that a firm will produce and offer to sell greater quantity of a product or
service as the price of that product or services rises, other things being equal. There is direct
relationship between price and quantity supplied. In this statement, change in price is the cause
and change in supply is the effect. Thus, the price rise leads to supply rise and not otherwise. It
may be noted that at higher prices, there is greater incentive to the producers or firms to produce
and sell more. Other things include cost of production, change of technology, price of related
goods (substitutes and complements), prices of inputs, level of competition and size of industry,
government policy, and non-economic factors.

Thus ‘Ceteris Paribus’;

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BEFA Dr.Srikrishna.G

a. With an increase in the price of the good, the producer is willing to offer more of goods in the
market for sale.
b. The quantity supplied must be related to the specified time interval over which it is offered.

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