CHANGES IN SUPPLY:Changes in supply take place in two ways:

1. EXTENSION & CONTRACTION OF SUPPLY:According to the law of supply, when price changes supply also changes. The change in supply occurs due to the change in price is known as extension or contraction of supply. EXTENSION OF SUPPLY:Extension of supply occurs when supply increases due to rise in price level. e.g. Price (Rs.) Quantity Supplied (kg) 5 10 5 10

The above schedule shows that when the price of sugar is 5, supply is also 5 but when the price increases to 10 supply also increases to 10.

In the above curve, price is shown on y-axis and quantity supplied is shown on x-axis. We see that when the price is 5 supplies also 5 but when the price increases to 10 supplies also increases to 10.

CONTRACTION OF SUPPLY:Contraction of supply occurs when supply decreases due to decrease in price. e.g. Price (Rs.) Quantity supplied 10 5 10 5

The above schedule shows that when the price of sugar is 10, supply is also 10 but when the price decreases to 5 supply also decreases to 5.

In the above curve, price is shown on y-axis and quantity supplied is shown on x-axis. We see that when the price is 10 supplies also 10 but when the price decreases to 5 supplies also decreases to 5.

2. RISE AND FALL OF SUPPLY:According to the law of supply, when the supply of any commodity changes without the change in price, it is called rise or fall in supply. RISE IN SUPPLY:Rise in supply occurs, when the price remains same but supply increases or at a lower price supply remains the same. e.g. Price Quantity supplied (Rs.) (kg) 10 100 10 120 OR Price (Rs.) 10 5 Quantity supplied (kg) 100 100

The first one is when the price is Rs.10, the quantity is 100, and even though the price is still Rs.10 the quantity supplied goes up to 120, thus a rise in supply occur. The second is when the price is Rs.10, the quantity supplied is 100, but when the price falls to Rs.4, the quantity supplied still remains 100.

FALL IN SUPPLY:Fall in supply occurs, when either the price remaining the same, supply decreases or at a higher price, supply remains the same. e.g. Price (Rs.) Quantity supplied (kg) 10 15 100 100 OR Quantity supplied (kg) 100 80

Price (Rs.) 10 10

The first one is when the price is Rs.10, the quantity supplied is 100, but when the price increases to Rs.15, the quantity supplied still remains 100. The second is when the price is Rs.10, the quantity supplied is 100, and even though the price is still same but the quantity supplied decreases to 80. CAUSES OF RISE AND FALL IN SUPPLY 4

1) Changes in the Cost of Production:If the cost of production goes up, the price of the good will also go up, therefore this will result in the supply either to decrease or increase or remain constant & vice-versa. 2) Changes in Agriculture Output:With the invention of new machines to increase the agriculture output, the cost of production goes down, thus price also goes down, while supply will go up. If the case is opposite, e.g. the agriculture output be effected due to flood etc. the price of the product will remain constant or go up, and supply goes down. 3) Changes in Taxation:If the tax on imported products goes up, this will result in their prices going up. Therefore, supply will go down and vice-versa. 4) Development of Transport and Communication System:Due to new transport system, i.e. roads, supply of the product will rise as people from all over the place can sell their products, although its price is still the same. 5) Development of Sciences and Technology:Invention of machines in all productive sectors reduces the cost of production and at the same time increases supply.

ELASTICITY OF SUPPLY:-

Elasticity of supply is the degree of change responsiveness of the quantity supplied in relation to a change in price. By elasticity of supply we means that the ratio at which supply changes due to change in price level. When due to a little change in price supply changes to a great extent, it means that supply is more elastic and when due to a big change in price level, supply changes to a little extent, supply will be less elastic. MEASUREMENT OF ELASTICITY OF SUPPLY:There is only one method to measure elasticity of supply, i.e. the percentage method. This method can be divided into two parts. 1) Point Elasticity of Supply:- This method is adopted when there is a small change occur in price and quantity supplied. Formula is: % in Qs Q P % in P P Q

2) Arc Elasticity of Supply:- This method is adopted when there is a big change occur in price and quantity supplied. Formula is: % in Qs % in P Qo Q1/ Qo + Q1 Po P1/ Po + P1

We take the following examples to use the appropriate formula. Points A B C D E F SUPPLY SCHEDULE Price (Rs.) Supply (kg) 8.00 8.25 8.50 8.75 9.00 9.25 16 16.5 17 18 18 18.25

Measurement of elasticity of supply from 1) A- B 2) C- D 3) E- F 1) A- B:

= 16-16.5 / 8-8.25 8/16 = = = .5 /.25 1/2 .5 /.5 1

Because the curve touches the origin.

2) C- D:

= = = = =

17-18 / 8.50-8.75 8.5/17 1 / 14 8.5/ 17 4 8.5 /17 34/ 17 2

Because the curve touches the vertical axis.

3) E- F:

= =

18- 18.25 / 9- 9.25 9/18 0.25 / 0.25 1/2

Because the curve touches the horizontal axis.

TWO EXTREMES OF SUPPLY ELASTICITY:-

There are two extremes of elasticity of supply. 1) PERFECT ELASTICITY OF SUPPLY:Supply curve is the graph below is perfectly elastic (horizontal). The firm will supply any amount of output at Rs.4 per unit. If the price falls below Rs.4 (say Rs.3.5) per unit, then the quantity supplied fall to zero. The price is too low to sustain any produce in the market. Thus the elasticity of supply is infinite. .

2) PERFECT INELASTICITY:A perfectly inelasticity supply represents a situation in which a seller sells a fixed quantity of goods for sale. The price increases from Rs.4 to Rs.8 has not led to increase in quantity supplied. The quantity supplied is totally unresponsiveness to changes in price. The supply curve is vertical.

DETERMINANTS OF SUPPLY ELASTICITY:-

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The main factors which determine the degree of price of elasticity of supply are as under. 1) TIME PERIOD:Time is the most significant factor which affects the elasticity of supply. If the prices of a commodity rises & the producer have enough time to make adjustment in the level of output, the elasticity of supply will be more elastic. If the time period is short supply cant be affected after a price increase, the supply is relatively inelastic. 2) ABILITY TO STORE OUTPUT:The goods which can be safety stored have relatively elastic supply over the goods which are perishable & do not have storage facility. 3) FACTOR MOBILITY:If the factors of production can be easily moved from one use to another, it will affect elasticity of supply. The higher the mobility of factors, the greater is the elasticity of supply of the goods & vice-versa. 4) CHANGES IN MARGINAL COST OF PRODUCTION:If with the expansion of output, marginal cost increases & marginal returns declines, the price elasticity of supply will be less elastic to that extent. 5) AVAILABILITY OF INFRASTRUCTURE FACILITIES:If infrastructure facilities are available for expanding output of a particular good in response to the rise in prices, the elasticity of supply will be more elastic.

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