Supply

SUPPLY & elasticity of supply Dewett 218/225 &225/231

SUPPLY - DEFINITION • Supply can be defined as the quantity of a commodity offered for sale at a price during a given period of time

SUPPLY AND STOCK • Stock is the total quantity of a commodity available for sale. • Supply is the quantity that would be sold at a given price. • Example- if in a market at a particular day and at a particular time 2000 tones of wheat are offered for sale at Rs 1400/- per ton, then 2000 tons is the supply of wheat at that price. But there might be stock of 10,000 tons of wheat at that time, out of these only 2000 tons are offered for sale.

SUPPLY SCHEDULE • Quantity of Milk offered in Ltrs • We have a supply schedule of a milkman in village. • We note as the price falls, less milk is being offered for sale, and as the price raises, the milkman is prepared to sell more

Price/ltr 10 8 7 6 5 4 3 2 1

Qty in Ltrs 20 15 12 10 8 6 4 2 nil

Supply curve • The supply curve can • Supply curve be represented in the y form of a curve as 10 shown in the diagram. Price 9 • Quantities of milk 8 Per offered for sale are 7 measured along ox andltr 6 prices on OY. The 5 supply curve SS’ slopes upwards as we go from 4 the left to the right. 3 • As the prices raises, 2 more is offered for sale 1 and vice versa o 5

10

15

Qty of milk in liters

20 x

LAW OF SUPPLY • “In a given market, at any time, the quantity of any goods which people are ready to offer for sale generally varies directly with price” • The law may be put in another way, • “other things remaining same, as the price of a commodity rises, its supply is extended , and as the price falls, its supply is contracted.”

• When prices are low many individuals and firms do not find it worth while to sell, for their costs may be high and profits will be low. But, when prices rise, they are in a position to carry on production with profit and sell more. Higher prices mean higher profits.

SOME EXCEPTIONS • AUCTIONIn an auction, goods are sold away whatever the bid. It is possible that the seller is badly in need of money and wants a certain amount of it. As soon as the amount is made up, he will refuse to sell more. Higher the price, smaller the quantity he will need to sell in order to get the required amount

Person going Abroad • Wants to get rid of a quantity of goods, whatever the price offered.

Price fall • When a heavy fall in price is expected, the sellers may become panicky. • They will sell more even if the price falls

ELASTICITY OF SUPPLY • The law of supply says that the supply varies directly with price. If the price raises, the quantity offered will extend, and as it falls the quantity offered will contract. • This attributes of supply, by virtue of which it extends or contracts with a rise or fall in price, is known as the Elasticity of Supply. • It refers to the sensitiveness or responsiveness of the supply to changes in price.

INELASTIC SUPPLY • Supply may not always respond to the changes in price at the same rate. • If the commodity is perishable, eg fruit, milk, vegetables the supply cannot be withheld and the whole of it must be offered for sale, whatever the price. • In this case, there is no difference between stock and supply- ie supply is inelastic and insensitive to change in price. • The price may be falling but the commodity will have to be sold away.

INELASTIC SUPPLY • In the same manner, if the production of a commodity requires a large fixed capital, say iron and steel products, cement, aero planes, motor cars etc the supply cannot be quickly increased when the price rises or decreased when it falls • The same is the case with a commodity which takes a long time to be put on the market. For example, you can increase the supply of wheat or cotton only in a year’s time at the next harvest. It is difficult to adjust the supply to demand immediately.

ELASTIC SUPPLY • If a small change in price (rise or fall) leads to a big change in supply (extension or contraction), the supply is elastic. On the other hand, if a considerable change in in price (rise or fall) leads to only a small change in supply (extension or contraction), it is inelastic or less elastic. • It should be noted that supply of no commodity is absolutely inelastic. Hence we should call it comparatively inelastic or less elastic

Elastic & Inelastic supplydiagrammatic representation Y

Y S’

P R I C E

O

P R I C E

S’ s

p1

p2

m

P’ p s

m2

QUANTITY ELASTIC SUPPLY

X

O

m m1 QUANTITY LESS/INELASTIC SUPPLY

X

Measurement of elasticity of supply • A vertical straight line will represent absolutely inelastic supply (zero elasticity) and a horizontal straight line an infinitely elastic supply. In between these two extremes, there will be varying degrees of elasticity. The following formula gives a measure of elasticity • Increase/decrease in supply amount originally supplied

rise/fall in price original price

POINT ELASTICITY • The following 4 diagrams will measure the elasticity of supply on any point in the supply curve. • The elasticity at point E is to be measured . Extend the supply curve SS downwards so that it meets X axis at T. • The formula is that MT/OM

• FIG 1 P1 p r i c e

T

s

Y

E1 E

P s

O qty

M

MI

X

• In fig 1, the extended supply curve meets the x axis to the left of the origin, MT is obviously greater than OM. Hence the elasticity of supply in this curve at any point on the curve is greater than unity.

• FIG 2

s

Y

E1

P1 p r i c e

E P s

O

T qty

M

MI

X

• In fig 2, the extended supply curve meets the x axis to the right of the origin, MT is obviously smaller than OM. Hence the elasticity of supply in this curve at any point on the curve is less than unity.

• FIG 3 p r i c e

E 1

Y

P1

• In fig 3, the extended supply curve meets the x axis at the point of the origin, MT is equal to OM. Hence the elasticity of supply in this curve at any point on the curve is unity. Ie MT/MO =1

s

E P s

T O qty

M

MI

X

• FIG4 Y S1 P R I C E

T

S

O

P

M QTY

X

• When the supply curve is not a straight line but a curve, then a tangent is drawn to the supply curve at a point at which elasticity of supply is to be measured. This tangent when extended meets X axis either to left or to right or passes through the point of origin and the supply elasticity can be found as explained in respect of straight line supply curve.

Factors affecting supply • NATURAL CONDITION-

If rainfall is timely and well distributed, there will be bomber crops. On the contrary, floods, droughts or earth quakes and other natural calamities are bound to affect production adversely.

Technical progress • Volume of production is influenced progress in technical area • New machine/ new process/new inventions

Change in factor prices • If the factors of production are cheap, supply will increase

Transport improvements

• Reduces the cost • Increases the supply

Calamities • Calamities like war or famine will affect the supply of goods.

Monopolies • The monopolists may deliberately increase or decrease the supply as it suites them.

Fiscal Policy • The fiscal policy of the government also affect the supply. For instance, a higher import duty will restrict the supply and a lower duty will stimulate it.

Inter related supply

COMPOSITE SUPPLY

Joint supply (sheep) gas wool

meet

electricity

skin LIGHT

oil

Joint supply • Refers to goods supplied or produced jointly • Eg- wheat and straw, coconut and oil

COMPOSITE SUPPLY • When there are different sources of supply of a commodity or service, we say that its supply is composed of all these sources. • We can get light from electricity, gas, kerosene oil, candles etc.