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 Price/ltr Qty in Ltrs
in Ltrs
10 20
• We have a supply
schedule of a milkman 8 15
in village. 7 12
• We note as the price
6 10
falls, less milk is being
offered for sale, and as 5 8
the price raises, the 4 6
milkman is prepared to
sell more 3 4
2 2
1 nil
 Supply curve
• The supply curve can • Supply curve
be represented in the
form of a curve as y
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
supply curve SS’ slopes 5
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 o5 10 15 20 x
Qty of milk in liters
 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
• AUCTION-
In 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 supply-
diagrammatic representation
Y Y
S’
P
P R
R I P’
I S’
C
C E p
p2
E p1
s
s

O X O X
m m2 m m1
QUANTITY
QUANTITY

ELASTIC SUPPLY LESS/INELASTIC SUPPLY

 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 rise/fall in price
amount originally supplied 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 s
• In fig 1, the extended
P1 Y E1 supply curve meets
p
E
the x axis to the left of
r
i P the origin, MT is
c obviously greater than
e s
OM. Hence the
elasticity of supply in
this curve at any point
on the curve is
T O M MI X
greater than unity.
qty
• FIG 2 s • In fig 2, the extended
Y
P1
E1 supply curve meets
p
E
the x axis to the right
r
i P of the origin, MT is
c obviously smaller
e
s than OM. Hence the
elasticity of supply in
this curve at any point
on the curve is less
O T M MI X
than unity.
qty
• FIG 3 s • In fig 3, the extended
P1 Y E supply curve meets
1
p
E
the x axis at the point
r
i P of the origin, MT is
c equal to OM. Hence
e
s the elasticity of supply
in this curve at any
point on the curve is
T
unity. Ie MT/MO =1
O M MI X
qty
 • When the supply curve is
• FIG4 not a straight line but a
Y curve, then a tangent is
S1 drawn to the supply curve
P
at a point at which
R elasticity of supply is to
I be measured. This
S P
C tangent when extended
E meets X axis either to left
or to right or passes
through the point of origin
and the supply elasticity
T O M X can be found as explained
QTY 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
Joint supply
SUPPLY
(sheep)

gas electricity oil

skin
wool meet
LIGHT
 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.