MANAGERIAL ECONOMICS,

UNIT-II
BY Dr. RAVI KUMAR GUPTA
 TABLE OF CONTENT
Concepts of Demand and Supply:
 Demand Analysis
 Law of Demand
 Determinants of Demand
 Elasticity of Demand: Price, Income and cross Elasticity
 Uses of concept of elasticity of demand in managerial decision
 Demand Forecasting: Meaning, significance and methods of demand
forecasting,
 Law of Supply
 Determinants of supply
 Elasticity of supply
 DEMAND
 Demand refers to the willingness and ability of consumers to purchase a given
quantity of a good or service at a given price, at a point of time and at given
place.

 In economics, demand is formally defined as ‘effective’ demand meaning that it

is a consumer want or a need supported by an ability to pay – namely a budget
derived from disposable income. Income provides individuals with a purchasing
power which they exercise in a market through effective demand.
Wish to buy Willingness Ability to pay =Demand
to pay
yes No No No
Yes Yes No No
Yes Yes Yes Yes
CLARIFICATION…..
 Here consideration of possibility of sales of goods is important because we
always see the demand from the producers perspective. So any desire of
consumer which can not be converted into sales will not be amounted as
demand and hence not relevant.
means any ‘desire or willingness to buy’ a product if not supported by
‘willingness to pay’ and ‘ability to pay’ will not be considered as demand.
So, Demand= Wish to buy + Willingness to pay + Ability to pay
Further, Demand can be specify only at given price, for give period of time
and for given place.
Example, if we ask, what is the demand of BMW car? The question does not
clarifies demand at which price, for which year or month, in which country
or state.
The complete question will be, What will be demand of BMW in 2021, in
India at a price of Rs. 5 millions?
DEMAND FUNCTION
A mathematical expression of relationship between quantity demanded of the
commodity and its determinants is known as the demand function. Explained
below.

Qx = f(Px, Py, Pz, I, T, etc.)

Where,
Qx= Quantity Demanded of X
Px= Price of commodity X
Py= Price of Substitute goods
Pz= Price of complementary goods
I = Income of the Customer
T = Taste of the consumer
DEMAND SCHEDULE
Demand schedule is a tabular statement showing various quantities of a
commodity being demanded at various levels of price, during a given period of
time. It shows the relationship between price of the commodity and its quantity
demanded.

A demand schedule can be determined both for individual buyers and for the
entire market. So, demand schedule is of two types:
1. Individual Demand Schedule:- Individual demand schedule refers to a tabular
statement showing various quantities of a commodity that a consumer is willing
to buy at various levels of price, during a given period of time.

2. Market Demand Schedule:- Market demand schedule refers to a tabular

statement showing various quantities of a commodity that all the consumers are
willing to buy at various levels of price, during a given period of time. It is the
sum of all individual demand schedules at each and every price.
DEMAND CURVE

Demand curve is the graphical representation of the demand schedule. Demand

curve is obtained by plotting a demand schedule on a graph. As discussed
earlier, demand curve slopes downward from left to right. It has a negative
slope. It shows there is inverse relationship between price and quantity
demanded of a commodity.
TYPES OF DEMAND
1. Direct and indirect demand:

Producers’ goods and consumers’ goods: demand for goods that are directly
used for consumption by the ultimate consumer is known as direct demand
(example: Demand for T shirts).

On the other hand demand for goods that are used by producers for producing
goods and services. (example: Demand for cotton by a textile mill)

2. Derived demand and autonomous demand:

When a produce derives its usage from the use of some primary product it is
known as derived demand. (example: demand for tyres derived from demand
for car)

Autonomous demand is the demand for a product that can be independently

used. (example: demand for a washing machine)
CONTINUED…..
3. Durable and non durable goods demand:

Durable goods are those that can be used more than once, over a period of time
(example: Microwave oven)

Non durable goods can be used only once (example: Band-aid)

4. Firm and industry demand:

Firm demand is the demand for the product of a particular firm. (example: Dove
soap)

The demand for the product of a particular industry is industry demand

(example: demand for steel in India )
CONTINUED…..
5. Total market and market segment demand:

A particular segment of the markets demand is called as segment demand

(example: demand for 21 laptops by engineering students)

The sum total of the demand for laptops by various segments in India is the total
market demand. (example: demand for laptops in India)

6. Short run and long run demand:

Short run demand refers to demand with its immediate reaction to price changes
and income fluctuations.

Long run demand is that which will ultimately exist as a result of the changes in
pricing, promotion or product improvement after market adjustment with
sufficient time.
CONTINUED…..
7. Joint demand and Composite demand:

When two goods are demanded in conjunction with one another at the same time
to satisfy a single want, it is called as joint or complementary demand.
(example: demand for petrol and two wheelers)

A composite demand is one in which a good is wanted for several different uses.
( example: demand for iron rods for various purposes)

8. Price demand, income demand and cross demand:

Demand for commodities by the consumers at alternative prices are called as

price demand.

Quantity demanded by the consumers at alternative levels of income is income

demand.

Cross demand refers to the quantity demanded of commodity ‘X’ at a price of a

related commodity ‘Y’ which may be a substitute or complementary to X.
THE LAW OF DEMAND
The law of demand states that, if all other factors remain equal,
“As the price increases, quantity demanded of that commodity decreases and as
the price decreases the quantity demanded of the commodity increases.”

Px Dx

Px Dx

Where,
Px= Price of Commodity X
Dx= Demand of Commodity X
ASSUMPTIONS TO LAW OF DEMAND

I. There is no change in the tastes and preferences of the consumer;

II. The income of the consumer remains constant;

III. There is no change in customs;

IV. There should not be any substitutes of the commodity;

V. There should not be any change in the prices of other products;

VI. There should not be any change in the quality of the product; and

VII. The habits of the consumers should remain unchanged.

EXCEPTIONS TO THE LAW OF DEMAND:
In certain cases, the demand curve slopes up from left to right, i.e., it has a
positive slope. Under certain circumstances, consumers buy more when the
price of a commodity rises, and less when price falls:

(i) War:- If shortage is feared in anticipation of war, people “may start buying
for building stocks or for hoarding even when the” price rises.

(ii) Depression:- During a depression, the prices of commodities are very low and
the demand for them is also less. This is because of the lack of purchasing
power with consumers.

(iii) Ignorance Effect:- Consumers buy more at a higher price under the influence
of the “ignorance effect”, where a commodity may be mistaken for some other
commodity, due to deceptive packing, label, etc.
CONTINUED…..

(iv) Giffen Paradox:- If a commodity happens to be a necessity of life like wheat

and its price goes up, consumers are forced to curtail the consumption of more
expensive foods like meat and fish, and wheat being still the cheapest, food
they will consume more of it.

(v) Demonstration Effect (Veblen Goods):- If consumers are affected by the

principle of conspicuous consumption or demonstration effect, they will like
to buy more of those commodities which confer distinction on the possessor,
when their prices rise. On the other hand, with the fall in the prices of such
articles, their demand falls, as is the case with diamonds.
DETERMINANTS OF DEMAND
The demand for a product is determined by different factors. The main demand
determinants are price, income, price of related goods and advertising.
Therefore, demand is a multivariate relationship, i.e. it is determined by
many factors simultaneously.

(A) Determinants of Individual Demand: Let us discuss the variables which

influence the individual demand.

1. Price of the Commodity:- Normally a larger quantity is demanded at a lower

price that at a higher price. There is inverse relationship between the price and
quantity demanded. This is called the law of demand.
CONTINUED…..

2. Income of the Consumer:- The income of the consumer is another important

variable which influences demand. The ability to buy a commodity depends
upon the income of the consumer. When the income of the consumers
increases, they buy more and when income falls they buy less.

3. Tastes and Preferences:- The demand for a product depends upon tastes and
preferences of the consumers. If the consumers develop taste for a commodity
they buy whatever may be the price.

4. Prices of Related Goods:-The related goods are generally substitutes and

complementary goods. The demand for a product is also influenced by the
prices of substitutes and complements. When a want can be satisfied by
alternative similar goods they are called substitutes, such as coffee and tea.
Whenever the price of one good and the demand for another are inversely
related then the goods are said to be complementary, such as car and petrol.
CONTINUED…..

5. Advertisement and Sales Propaganda:- Advertisement helps in increasing

demand by informing the potential consumers about the availability of the
product, by showing the superiority of the product, and by influencing
consumer choice against the rival products. The demand for products like
detergents and cosmetics is mainly caused by advertisement.

6. Consumer’s Expectation:- A consumer s expectation about the future

changes in price and income may also affect his demand. If a consumer
expects a rise in prices he may buy large quantities of that particular
commodity. Similarly, if he expects its prices to fall in future, he will tend to
buy less at present. Similarly, expectation of rising income may induce him to
increase his current consumption.
CONTINUED…..

(B) Determinants of Market Demand:- Market demand for a product refers to

the total demand of all the buyers taken together. How much quantity the
consumers in general would buy at a given period of time constitutes the total
market demand for the product.

1. Price of the Product:- The law of demand states that if other things remain
the same when price falls, demand increases and vice-versa.

2. Standard of Living and Spending Habits:- When people are accustomed to

high standard of living their spending on comforts and luxuries also increase,
that automatically increase the demand.

3. Distribution of Income Pattern:- If the distribution pattern of income is fair

and equal the market demand for essential items tends to be greater.
CONTINUED…..
4. The Scale of Preferences:- The market demand for a product is also affected
by the scale of preference of buyers. If there is a shift in consumers’ preference
from x to y, the demand for у tends to increase.

5. The Growth of Population:- The growth of population is also another

important factor that affects the market demand. With the increase in
population, people naturally demand more goods for their survival.

6. Social Customs and Ceremonies:- Social customs and ceremonies are

usually celebrated collectively. They involve extra expenditure on certain items
and thereby increase the demand.

7. Future Expectation:- People are not sure about their future, because future is
uncertain. If the consumers expect a rise in prices of products, they buy more
at present and preserve the same for the future, thereby the market demand
would be affected.
CONTINUED…..

8. Tax Rate:- High tax rate would generally mean a low demand for the goods.
At certain times the government restricts the consumption of a commodity and
uses the tax as a weapon.

9. Inventions and Innovations:- Inventions and innovations introduce new

goods in the market. The consumers will have a strong tendency to purchase
the new product. The preference over the new goods adversely affects the
demand for the existing goods in the market.

10. Weather Conditions:- Seasonal factors also affect the demand. The demand
for certain items purely depends on climatic and weather conditions. For
example, the growing demand for cold drinks during the summer season and
the demand for sweaters during the winter season.
CONTINUED…..

11. Availability of Credit:- The purchasing power is influenced by the

availability of credit. If there is availability of cheap credit, the consumers try
to spend more on consumer durables thereby the demand for certain products
increase.

12. Pattern of Saving:- If people begin to save more, their demand will decrease.
It means the disposable income will be less to purchase the goods and
services. On the contrary, if saving is less their demand will increase.

13. Demonstration Effect:- Demonstration effect helps to increase human wants.

In underdeveloped countries, there is a desire in the minds of the people to
imitate other people for conspicuous consumption and that is why they are not
able to save. This change in the saving habits of the people is due to “contact
effect”. The demonstration effect has a positive effect on the demand for
comforts and luxury goods.
 UTILITY ANALYSIS
What Is Utility?
Utility is a term in economics that refers to the total satisfaction received
from consuming a good or service. Economic theories based on rational
choice usually assume that consumers will strive to maximize their
utility. The economic utility of a good or service is important to
understand, because it directly influences the demand, and therefore
price, of that good or service. In practice, a consumer's utility is
impossible to measure and quantify. However, some economists believe
that they can indirectly estimate what is the utility for an economic good
or service by employing various models.
The utility definition in economics is derived from the concept of
usefulness. An economic good yields utility to the extent to which it's
useful for satisfying a consumer’s want or need.
 APPROACHES TO UTILITY ANALYSIS

There are to ways to measure utility:-

1. Ordinal Approach:- according to this approach, utility is a psychological
term, can be explained in qualitative aspect. Hence can not be measured in
numerical value, only can be compared.

2. Cardinal Approach:- according to this approach, utility can be quantify

and hence can be measured in numerical value. Unit used for measuring utility
is “Util”.
 TOTAL UTILITY

Total utility is the sum of utility derived from different units of a commodity
consumed by a consumer at any point of consumption.

According to Leftwitch, “Total utility refers to the entire amount of satisfaction

obtained from consuming various quantities of a commodity.”

Suppose a consumes X unit of a commodity, then total utility consumed by

consumer Ux is:-

Ux = U1+ U2+U3+………Ux
 MARGINAL UTILITY
The Marginal Utility is the utility derived from the additional unit of a commodity
consumed. The change that takes place in the total utility by the consumption of an
additional unit of a commodity calls marginal utility.

According to Chapman,
“Marginal utility is the addition made to total utility by consuming one more unit
of commodity.”

The marginal utility can measure with the help of the following formula
MUnth = TUn – TUn-1
Here;
MUnth= Marginal utility of nth unit.
TUn= Total utility of “n” units, and.
TUn-1 = Total utility of n-1 units.
THE LAW OF DIMINISHING MARGINAL UTILITY

This is an important law under Marginal Utility Analysis. Alfred Marshall, British
Economist defines the law of diminishing marginal utility as follows:
“The additional benefit which a person derives from a given increase in the stock
of a thing diminishes with every increase in the stock that he already has.”

This law is based on the fundamental tendency of human nature. Human wants are
virtually unlimited. However, every single want is satiable. Hence, as we
consume more and more units of a good, the intensity of our want for the good
decreases. Eventually, it reaches a point where we no longer want it.

In other words, as we consume more units of a good, the extra satisfaction that we
derive from the extra unit keeps falling. However, it is important to remember
that the marginal utility declines not the total utility.
ELASTICITY OF DEMAND
If price changes we know the demand changes, but by how many percentage?
Means what is the elasticity of that demand?
Elasticity measures the extent to which demand will change. Elasticity of
demand is a measure to responsiveness of change in quantity demanded of a
commodity due to change in a particular factor of demand.

Elasticity of Demand=

Elasticity can be of three types:

1. Price Elasticity of Demand
2. Income Elasticity of Demand
3. Cross Elasticity of Demand
1. PRICE ELASTICITY OF DEMAND
Price elasticity of demand measures the percentage change in quantity
demanded caused by a percent change in price.

Price Elasticity of Demand (Ep)=

Ep=

Where,
∆q= Change in quantity demanded of commodity x
∆p= Change in price of commodity x
p= price of commodity x
q= quantity demanded of commodity x
TYPES OF PRICE ELASTICITY OF DEMAND

1. ELASTIC DEMAND:- a change in price, results in a greater than

proportional change in the quantity demanded. Ep>1

2. INELASTIC DEMAND:- a change in price results in a less than proportional

change. Ep<1

3. UNITARY ELASTIC DEMAND :- a change in price results in n equal

proportional change. Ep=1

4. PERFECTLY ELASTIC DEMAND :- demand changes even when price

remains unchanged. Ep=∞

5. PERFECTLY INELASTIC DEMAND ;- change in price does not result in

any change. Ep=0
INCOME ELASTICITY OF DEMAND
The percentage change in quantity demanded due to percentage change in
income is called income elasticity of demand. Income elasticity of demand
measures the responsiveness of demand for a good to change in income of
consumer.

Income Elasticity of Demand (Ey) =

Ey=
Where,
∆q= change in quantity demanded of commodity x
∆y= change in the income of the consumer
q= quantity demanded of commodity x
y= income of the consumer
TYPES OF INCOME ELASTICITY OF DEMAND

1. POSITIVE INCOME ELASTICITY

A rise in income will cause a rise in demand , A fall in income will cause a fall
in demand. Ey>0

2. NEGATIVE INCOME ELASTICITY

An increase in income will result in a decrease in demand, A decrease in
income will result in a rise in demand. (ex. Inferior good) Ey<0

3. ZERO INCOME ELASTICITIES

This occurs when a change in income has NO effect on the demand for goods.
(ex. A rise of 5% income will leave the Demand for salt unchanged). Ey=0
CROSS ELASTICITY OF DEMAND

There is cross elasticity of demand when demand for a commodity changes

due to a change in the price of another related commodity. In fact cross
elasticity of demand measures the change in demand of a commodity (say
coffee) when the prices of another related commodity (say tea) changes by
small amount.

Cross Elasticity of Demand (Ec)=

Ec=
Where,
∆qx= change in quantity demanded of commodity ‘x’
∆px = change in Price of related commodity ‘y’
qx = quantity demanded of commodity ‘x’
px = Price of related goods ‘y’ (substitute or complementary goods)
TYPES OF CROSS ELASTICITY OF DEMAND

1. Positive Cross Elasticity of Demand

Implies that the cross elasticity of demand would be positive when increase in
the price of one good (Y) causes increase in the demand for the other good
(X). In simple terms, cross elasticity would be positive for substitutes. (ex. Tea
and coffee). Ec>0

2. Negative Cross Elasticity of Demand

Refers to a situation when the rise in the price of one good (Y) reduces the
demand for the other good (X). The cross elasticity of demand would be
negative for complementary goods. (ex. Pen and Ink) Ec<0
USE OF ELASTICITY OF DEMAND IN
MANGERIAL DECISIONS
1. Price Discrimination:- A monopolist adopts a price discrimination policy
only when the elasticity of demand of different consumers or sub-markets is
different. Consumers whose demand is inelastic can be charged a higher price
than those with more elastic demand.

2. Factor pricing:-Elasticity of demand is used as tool to determine prices of

factors of production. In case of inelastic demand prices are fixed high. When
there is an elastic demand prices are fixed at low level.

3. For forecasting demand:- Income elasticity of demand can be used for

predicting future demand of any goods and services in a case when
manufacturers have knowledge of probable future income of the consumers.
CONTINUED……

4. Prices and output determination:- The producers make decisions about

output and prices. Elasticity of demand is helpful information for producers.
The price is high for less elastic demand. In case of elastic demand price is
low.

5. Sales policy in super market:- In super market sales policy is determined on

the basis of elasticity of demand. Lowering price level maximizes the sales. So
they lower the price to increase sales quantity, Which will result as increase in
final sale value.

6. Labor Force Replacement:- Elasticity of demand for production determines

whether or not machines will replace labor. In case of inelastic demand output
will be fixed, so labor force can be replaced by machines. But in case of elastic
demand, output keep changing and to cope-up with that change labor force is
needed.
CONTINUED……
7. Shifting of Tax Burden:- It is possible for a business to shift a commodity tax
in case of inelastic demand to his customers. But if the demand is elastic, he
will have to bear the tax burden himself, otherwise demand for his goods will
go down sharply.

8. Joint Product Prices:-Certain goods, being products of the same process are
jointly supplied, e.g. milk and butter. Here if the demand for milk is inelastic
compared to the demand for butter, a higher price for milk can be charged with
advantage.

9. Imposition of GST:- The government can impose GST on different goods.

Elasticity of demand is helpful to select goods for tax. When demand is
inelastic tax GST can be imposed at high rate. In case of elastic demand tax
GST will be imposed at lower rate.

10. Others:- Product dumping, deciding of price strategy, Public utility pricing
etc.
DEMAND FORECASTING
Demand forecasting is a combination of two words;
the first one is Demand and another forecasting. Demand means outside
requirements of a product or service. In general, forecasting means making an
estimation in the present for a future occurring event.

So, “Demand forecasting is the process of making estimations about

future customer demand over a defined period, using historical data and
other information.”

Critical business assumptions like turnover, profit margins, cash flow,

capital expenditure, risk assessment and mitigation plans, capacity planning,
etc. are dependent on Demand Forecasting.
IMPORTANCE OF DEMAND FORECASTING

 Sales forecasting helps with business planning, budgeting, and goal setting.

 It allows businesses to more effectively optimize inventory, increase inventory

turnover rates and reduce holding costs.

 Plays a crucial role in making budget by estimating costs and expected

revenues.

 Anticipating demand means knowing when to increase staff and other resources
to keep operations running smoothly during peak periods.

 It helps an organization to control its production and recruitment activities.

METHODS OF DEMAND FORECASTING

i. OPINION POLLING METHODS

a) EXPERT’S OPINION METHOD :- In this method, the experts

on the particular product whose demand is under study are
requested to give their ‘opinion’ or ‘feel’ about the product. These
experts, dealing in the same or similar product, are able to predict
the likely sales of a given product in future periods under different
conditions based on their experience.

b) CONSUMER’S SURVEY METHOD:- Under this method,

the forecaster selects few consuming units out of the relevant
population and then collects data on their probable demands for the
product during the forecast period.
CONTINUED……

c. COMPLETE ENUMERATION SURVEY :- Under this, the forecaster

undertakes complete survey of all consumers whose demand he intends to
forecast, So here large number of consumers will be there to get the unbiased
information. The main advantage of this method is its accuracy and its main
drawback is it is time consuming one.

d. DELPHI METHOD:- is a forecasting process framework based on the results

of multiple rounds of questionnaires sent to a panel of experts. Several rounds
of questionnaires are sent out to the group of experts, and the anonymous
responses are aggregated and shared with the group after each round. The
experts are allowed to adjust their answers in subsequent rounds, based on how
they interpret the "group response" that has been provided to them. Since
multiple rounds of questions are asked and the panel is told what the group
thinks as a whole, the Delphi method seeks to reach the correct response
through consensus.
CONTINUED……

ii. STATISTICAL METHODS:

a. TREND PROJECTION METHOD:- Under this method, the time series data
on the under forecast are used to fit a trend line or curve either graphically or
through statistical method of Least Squares. The trend line is worked out by
fitting a trend equation to time series data with the aid of an estimation
method. The trend equation could take either a linear or any kind of non-linear
form.

b. BAROMETRIC TECHNIQUE:- the barometric method of forecasting is

used by the meteorologists in weather forecasting. The weather conditions are
forecasted on the basis of the movement of mercury in a barometer. This
method is based on the past demands of the product and tries to project the
past into the future. The economic indicators are used to predict the future
trends of the business. Based on future trends, the demand for the product is
forecasted.
CONTINUED……

c. REGRESSION ANALYSIS: This method establishes a relationship between

the dependent variable and the independent variables. In our case, the quantity
demanded is the dependent variable and income, the price of goods, the price of
related goods, the price of substitute goods, etc. are independent variables. The
regression equation is derived assuming the relationship to be linear. Regression
Equation: Y = a + bX. Where Y is the forecasted demand for a product or
service.

d. SIMPLE MOVING AVERAGES:- The best-known forecasting methods is the

moving averages or simply takes a certain number of past periods and add them
together; then divide by the number of periods. Simple Moving Averages (MA)
is effective and efficient approach provided the time series is stationary in both
mean and variance. The following formula is used in finding the moving
average of order n, MA(n) for a period t+1,
 SUPPLY
MEANING OF SUPPLY
Supply of a commodity refers to the various quantities of the commodity which
a seller is willing and able to sell at different prices in a given market at a point
of time, other things remaining the same. Supply is what the seller is able and
willing to offer for sale.
The quantity supplied is the amount of a particular commodity that a firm is
willing and able to offer for sale at a particular price during a given time period.

Law of Supply
States that, all other factors being equal, “as the price of a good or service
increases, the quantity of goods or services that suppliers offer will
increase, and vice versa.” The law of supply says that as the price of an item
goes up, suppliers will attempt to maximize their profits by increasing the
quantity offered for sale.
LAW OF SUPPLY

States that, all other factors being equal, “as the price of a good or service
increases, the quantity of goods or services that suppliers offer will
increase, and vice versa.” The law of supply says that as the price of an item
goes up, suppliers will attempt to maximize their profits by increasing the
quantity offered for sale.
Assumptions:-
 No change in cost of production
 No change in technology
 No change in prices of substitutes
 No change in price of capital goods
 No change in tax policy
 No change in climate
DETERMINANTS OF SUPPLY

1. Change in Factors Prices:-There are various factors which are used in the
production of commodities. The prices of those factors affect the cost of
commodity. If the prices of the factors increase, the supply of a commodity
decreases due to increased in the cost of production. And if the prices of these
factors decrease, it will result in decreasing the cost of production and the
supply of a commodity will increase.

2. Means of Transport and Communication:- The means of transport and

communications are roads, railways, aero planes, ships, telephones, TV., radio
etc. These means are important factors for economic growth of an economy.
By the provision and improvement of these means, people can sell their
products in all markets in a short time. Especially, the supply of perishable
goods (Fruit, vegetables) can be ensured due to fast means of transport and
communication.
CONTINUED……

3. Climatic Changes:- The weather conditions affect the supply of agricultural

products. There will be possibility of bumper crops due to favorable climatic
conditions. On the other hand, the supply of agricultural products decreases in
the presence of natural calamities or unfavorable weather conditions, e.g. if
rain is not timely and plentiful, it will cause lower the supply of crops.

4. Trade Policy:- The government announces its trade policy every year. If the
government announces some concessions in trade policy, then the quantity
supplied increases.

5. Industrial Expansion:- There is a tendency of industrial expansion in a

country, the productive capacity of industrial units will increase and quantity
supplied also will increase.
CONTINUED……

6. Future Expectations:- The goal of a firm is to maximize its profit. If an

entrepreneur expects higher profits in the future, he will take the risk of more
investment and the goods are produced on large scale. It will result to increase
in the supply of commodity and the supply curve will shift upward.

7. Scientific Development:- If scientific methods are developing in a country the

cost of production is decreasing due to the new discoveries and inventions.
Then the quantity supplied will increase.

8. Political Conditions:- The political stability or instability affects the supply of

goods in the economy. The stable law and order situation encourages the local
as well as foreign investment progress. The supply curve shifts to the left or
downward of the original supply curve due to some kinds of political
disturbances e.g. War, dictatorship, changes in governments, weak political
institutions etc.
CONTINUED……

9. Taxation Policy:- The Taxation policy of a government directly affects the

supply of locally manufactured goods as well as imports. If government levies
heavy taxes, the supply of imports decreases. The supply curve shifts upward
or down ward by decreasing or increasing the rate of taxes.

10. Means of Transport and Communications:- The means of transport and

communications are important factors for economic growth of an economy. By
the provision and improvement of these means, people can sell their products
in all markets in a short time. Especially, the supply of perishable goods (Fruit,
vegetables) can be ensured due to fast means of transport and communication.

11. Change in the Prices of Substitutes:- If the. Prices of substitutes decrease the
purchasing tendency of buyers will divert to that commodities and the supply
of commodity will decrease.
ELASTICITY OF SUPPLY
Responsiveness of producers to changes in the price of their goods or services.
As a general rule, if prices rise so does the supply.
Elasticity of supply is measured as the ratio of proportionate change in the
quantity supplied to the proportionate change in price. High elasticity indicates
the supply is sensitive to changes in prices, low elasticity indicates little
sensitivity to price changes, and no elasticity means no relationship with price.
Also called price elasticity of supply.
Price elasticity of supply measures the relationship between change in
quantity supplied and a change in price.

Elasticity of Supply (Es)=

TYPES OF PRICE ELASTICITY OF SUPPLY
1. Perfectly inelastic: If there is no response in supply to a change in price.
Es=0
2. Inelastic supply: The proportionate change in supply is less than the change
in price. Es<1
3. Unitary elastic: The percentage change in quantity supplied equals the
change in price. Es=1

4. Elastic: The change in quantity supplied is more than the change in price.
Es>1

5. Perfectly elastic: Suppliers are willing to supply any amount at a given price.
Es=∞