Short
Answer Type Questions
(ii)
Geometric Method : Geometrically, elasticity of supply depends on the ‘origin’ of
the supply curve. The geometric method shows elasticity of supply by three
different cases. These are:
- Changes in
the goals of producers.
- Fall in the
price of other commodities.
- Fair in the
price of factors of production.
- Change in
production cost.
- Increasing
use of technology in production.
- Change in
the size of industry.
(ii)
Unitary Elastic Supply : When the proportionate change in supply equals the proportionate
change in price, it is the case of unitary elasticity of supply.
(iii)
Perfectly Elastic Supply : When at a particular level of price, sellers are willing to supply
infinite amounts of supply but nothing will be supplied at a price lower than
this, it is the case of perfectly elastic supply.
(iv)
More than Unitary Elastic : When the change in supply is more than proportionate to the
change in price, it is the case of highly elastic supply.
(v)
Less than Unitary Elastic or Less Elastic : When the change in supply is lesser than
proportionate change in price, it is the case of less elastic supply.
It
is the case of unit elastic of supply.
Generally,
excise tax is applied per unit of a firm’s production. Accordingly, the
marginal and average cost of the manufacturer increases. In that case, a
producer should be ready to sell less at the current price, or he will sell the
same quantity at an increased price. This means that the supply curve is in the
condition of a lack of supply as compared to previous state. Following
graphical presentation shows that when the excise duty levied, he is willing to
sell only PK. Supply curve shifts backward from S1 S1 to S2 S2.
- The prices
of factors of production of a certain product do not show any changes.
- The
technique of production does not show any change.
- There is no
change in the prices of related goods.
- The taxes
levied by government and the grants given should remain constant.
(ii)
Number of Companies Increases : The increase in the number of companies increase the supply of
the market, however, as prices start falling, some companies who do not expect
to earn any profits at low cost either stop production or reduce it. This
reduces the supply of commodity because the number of companies in the market
decreases.
(iii)
Variation in Stock : When the price of a good increase, vendors are ready to supply
more goods than their stock, however, at a relatively low cost, the producers
do not release large amounts from their stock, they start increasing their
stock with a view that price may increase in the near future.
(iv)
Change in Technology: Change in technology also affects supply of the commodity.
Improvement in the technique of production reduces cost of production.
Consequently, profits tend to increase inducing an increase in supply.
Question
17. Calculate market supply from the following data:
|
Price |
10 |
20 |
30 |
40 |
50 |
60 |
70 |
|
Supply of Firm A |
10 |
15 |
20 |
30 |
40 |
50 |
60 |
|
Supply of Firm B |
20 |
30 |
40 |
60 |
80 |
100 |
120 |
Answer:
|
Price |
10 |
20 |
30 |
40 |
50 |
60 |
70 |
|
Supply of Firm A |
10 |
15 |
20 |
30 |
40 |
50 |
60 |
|
Supply of Firm B |
20 |
30 |
40 |
60 |
80 |
100 |
120 |
|
Market Supply |
10 + 20 = 30 |
15 + 30 = 45 |
20 + 40 = 60 |
30 + 60 = 90 |
40 + 80 = 120 |
50 + 100 = 150 |
60 + 120 = 180 |
Above
schedule indicates that when price of commodity is ₹ 10, the firms will supply
30 units of a commodity. When price increases to ₹ 20, firm ‘A’ supplies 15
units and firm ‘B’ supplies 30 units. Thus, the market supply is 15 + 30 = 45
units. As the price rises, market supply also increases.
Supply ……. Oq to Oq1
Long Type Questions
(i)
Perfectly Inelastic Supply : When there is no change in quantity of supply in response to
change in price, it is known as Zero Elasticity of supply or Completely Stable
Supply. The supply curves become vertical or parallel to the Y-axis, supply of
rare books, postage stamps, coins, etc. is completely stable. Since these items
are rare, despite change in price, there can be no change in their supply. For
example, if the supply of rare coins is one hundred, it will remain the same,
whether their price is ₹ 5,000 per coin or ₹ 50,000 per coin. It should be
clear from the given below schedule and diagram :
|
Price Per Unit
(in ₹) |
Quantity Supplied |
|
5,000 |
100 |
|
50,000 |
100 |
(ii)
Perfectly Elastic Supply : When at a particular level of price, the vendor is ready to
supply in unlimited quantities, but nothing will be given at a lower cost, it
is a case of perfectly elastic supply, and the supply curve becomes parallel to
the X-axis or horizontal. Supply of commodity may increase or decrease to any
extent without any change or infinitesimal change in its price. It should be
clear from the given below schedule and diagram:
|
Price Per Unit
(in ₹) |
Quantity Supplied (Units) |
|
7 |
10 |
|
7 |
15 |
It
appears from the schedule that the price of the commodities remaining the same,
supply has considerably increased.
The
increase in demand causes the equilibrium price to rise. When the price rises,
the quantity supplied rises. This increase f in quantity supplied is
represented by the movement along the supply curve. To summarize, a shift in
the supply curve is called a “Change in Supply,” and shift in demand curve is
called a “Change in Demand.” A movement along a fixed supply curve is called a
“Change in the Quantity Supplied,” and a movement along a fixed demand curve is
called a “Change in the Quantity Demanded.”
For
example, suppose that during another summer, a hurricane destroys a part of the
sugarcane crop and drives up the price of sugar. How does this event affect the
market for ice cream? We have to understand the hurricane effect in three
steps:
(ii)
The supply curve shifts to the left because, at every price, the total amount
that firms are willing and able to sell is reduced. The given below figure
reflects the decrease in supply as a shift in the supply curve from S1 to S2.
(iii)
The figure shows the shift in the supply curve raises the equilibrium price
from $ 2.00 to $ 2.50 and lowers the equilibrium quantity from 7 to 4 cones. As
a result of the sugar price increase, the price of ice cream rises, and the
quantity of ice cream sold falls.
An
event that reduces quantity supplied at any given price shifts the supply curve
to the left. The equilibrium price rises, and the equilibrium quantity falls.
Here, an increase in the price of sugar (an input) causes seller to supply less
ice cream. The supply curve shifts for S1 to S2 which causes the
equilibrium price of ice cream to rise from $ 2.00 to $ 2.50 and the
equilibrium quantity to fall from 7 to 4 cones.
(i)
Nature of the Inputs Used : The elasticity of supply depends on the nature of inputs used
for the production of commodity. If the production of a product utilizes factor
of production that are commonly used to produce other products, it will tend to
have a more elastic supply. On the other hand, if it uses specialized factors
of production suited only for its production, its supply will be relatively
inelastic.
(ii)
Nature and Size of the Industry : The supply of a commodity depends also on whether an industry is
monopolized or competitive. Under monopoly, supply is fixed. When a monopolized
industry is made competitive, the total supply increases. Besides, if size of
an industry increases due to new firms joining the industry, the total supply
increases and supply curve shifts rightward.
(iii)
Risk Bearer : The
elasticity of supply depends on the willingness of the entrepreneurs to take
risk. If the entrepreneurs are willing to take risk, the supply will be more
elastic. On the other hand, if the entrepreneurs hesitate to take risk, the
supply will be inelastic.
(iv)
Cost of Production : If the marginal cost of commodity is increasing, the producer
will not like to produce it more even if its price is increasing. He may go on
producing additional units if the rate of increase in price is higher than the
rate of increase in the marginal cost. On the contrary, if the marginal cost of
production has been falling or is lesser than the market price of the
commodity, the producer will be induced to increase the supply, so that he may
earn more profit.
(v)
Time Factor: The
supply of commodity can be easily raised or curtailed in the long period as per
the requirement, so the elasticity of supply will be inelastic in the short
term, because the supply cannot be raised or curtailed easily in the short
period.
(vi)
Technological Progress : Technological changes that reduce cost of production or increase
efficiency cause increase in product supply. For instance, introduction of high
yielding variety of paddy and new techniques of cultivation increased per acre
yield of rice in India in the 1970s. Such changes make the supply curve shift
to the right.
(vii)
Price of Product Substitutes : In production of many commodities, it is possible to produce
some other goods which require a similar technology. For example, a
refrigerator company can also produce ACs; Tata, famous for truck production,
can also produce cars; Maruti Udyog can produce trucks, and so on. Fall in the
price bf one of the product substitutes may lead to the rise in the supply- of
other products due to capacity utilization for profit maximization.
(viii)
Government Policy : When government imposes restrictions on production, e.g., import
quota on inputs, rationing of or quota imposed on input supply, etc. production
tends to fall. Such restrictions make supply curve to shift leftward.
|
Price Per Unit |
Quantity Supplied |
|
40 |
400 |
|
60 |
600 |
It
reflects from the given above schedule that both price and supply have increase
by 50%.
(ii) Greater than Unit Elastic Supply : When the change in supply is more than proportionate to the change in price, it is the case of highly elastic supply (es > 1). The positively sloped straight line supply curve meets the line of the Y-axis above the origin O. In this case, percentage change in the supply is more than percentage change in price. For example, the price increased by 20%, but the supply increased by 50%. Let us consider the following schedule:
|
Price Per Unit |
Quantity Supplied |
|
20 |
100 |
|
24 |
150 |
|
Price Per Unit |
Quantity Supplied |
|
50 |
100 |
|
75 |
120 |
Determinants
of Supply or Factors Affecting Supply S = f (P, Pr, Pf, T, G, E, O)
(i)
Price of the Product (P) : Other things being equal, when price increases then supply
increases and when price decreases then supply decreases. Thus, there is
positive relation between price and supply.
(ii)
Price of Related Goods (Pr): The supply of a commodity depends upon the price of all other
related commodities. If prices of related commodities (substitutes) rise, its
supply will decrease, and the supply of this commodity will increase, since
producers will increase production to earn more profits. Similarly, when the
price of a complementary commodity increases, the demand of other product is
reduced. Thus, producers reduce the production and supply of that commodity
rises. But supply of another commodity will fall. So, there is an inverse
relation.
(ii)
Price of Factors of Production (Pf) (Cost of Production) : A rise in prices of
factors of production of a commodity will make the production of that commodity
less profitable, so supply will decrease. If cost of production decreases then
supply will increase. There is also an inverse relation between supply and cost
of production.
(iv)
Technology (T): Technological
advances based on new discoveries and innovations reduce the cost of production
and results in more and more supply of the commodity, as the production and
supply of the commodity becomes more profitable.
(v)
Government Policy (G): The government policy may affect the supply by imposing taxes
and providing subsidy. If government policies are favourable (decrease in taxes
and increase in subsidy), then supply will increase, and if government policies
are unfavourable (increase in taxes and decreases subsidy), then supply will
fail.
(vi)
Future Expectation About Price (E) : If there is future expectation about rise in price, then the
supplier will not increase the supply at present, and if there is future
expectation about fall in price, then the supplier will increase his supply.
(vii)
Natural Factors (O) : Production of certain goods also depends on natural factors,
i.e.. Agricultural produce. Thus, supply of agricultural producers influenced
by natural factors. When natural factors are favourable, supply increases and
vice-versa.
(viii)
Goal of Producer : Whether the supply of a commodity will be less or more, depends
on the goal of the producer. If the goal is not earning profit but establishing
monopoly on market, he will try to maximise supply, even if he earns less
profit.
(ix)
Festival Time : Supply
of various commodities increases generally at festive season, since producers
know that demand of products rises at such time. In non-festival time, supply
drops. For example, in wedding season, demand of commodities like TV, fridge,
automobiles, clothes, jewellery etc. is much more, and so it is during the
Diwali season.
(x)
Transportation Cost: When transportation means are developed, the movement of goods
is rapid and transportation cost is less. Thus, supply increases.
Law
of supply is explained with the help of the following supply schedule :
|
Px (in₹) |
Sx (Units) |
|
10 |
100 |
|
11 |
200 |
|
12 |
300 |
The table shows that quantity supplied increases from 100 to 200 units when price increases from ₹ 10 to ₹ 11 per unit. Supply Curve (SS) slopes upward and shows increase in quantity supplied in response to increase in price of ‘the commodity. Thus, quantity supplied increases from OL to OL1, when price rises from OP to OP1.
(i)
Shift in supply curve occurs because of increase in supply, and increase in
supply is influenced by these factors :
(ii)
Shift in supply curve because of decrease in supply, and decrease in supply is
influenced by these factors :
Technology
improvement tends to lower the marginal and average cost of production. Because
more can be produced with less and less additional resources. Accordingly,
producers should be willing to supply more at the existing price. This implies
a forward shift in supply curve which is seen by the figure.
The
improvement in technology has the tendency of reducing the marginal and average
cost of production. Because more and more production can be done with less and
less additional resources, the producers should be ready to supply more at
current prices. This means forward shift in the supply curve, as it is seen by
the figure.
Initially,
PK quantity was supplied at price OP. After technological improvement, PT
quantity is supplied at the same price. It is a situation of rise in supply.
From
the given figure of extension in supply, it is clear that if price of commodity
is ₹ 2 per unit, the quantity supplied is 10 kg. Now, if price rises from ₹ 2
to ₹ 10, the quantity supplied increases from 10 to 30 units. This is extension
of supply.
Likewise,
from the given figure of contraction of supply, it is clear that when price
reduces from ₹ 10 to ₹ 2, the quantity supplied reduces from 30 units to 10
units only. This has been shown by movement from B to A. This is termed as a
Contraction of Supply.
Very Short Answer Type Questions
Multiple-Choice Questions
Multiple Choice Questions
