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The Supply Decision

“THE WILL TO WIN IS IMPORTANT, BUT THE
WILL TO PREPARE IS MORE IMPORTANT”

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SUPPLY ANALYSIS
“Supply is defined as the amount
of the commodity which the seller
or producers are able and willing
to offer for sale at a particular
price, during a certain period of
time.”
Supply Function—
QSx = f{ Px, St, Tr, Pr, Fp, Gp…….}
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 Determinants of Supply --
Price of the Commodity
Natural conditions
State of Technology
Transport conditions
Factor prices and their availability
Government Policy
Prices of related goods
Number of competitors
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 Law of Supply

Law of Supply states that, “Other

things remaining the same
(Ceterius Paribus) when the price
of the commodity increases the
quantity supplied increases.”

QSx = f {Px}

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 Supply Schedule
Price of Pizza (Rs.) Quantity Supplied
(units) Producer A
50 8

40 7

30 5

20 3

10 0
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 Market Supply Schedule –Horizontal
summation of individual supply
schedule
Price of QS by QS by QS by Market
Pizza Mr. A Mr. B Mr. C Supply
(Rs.)
50 8 10 12 30

40 7 9 11 27

30 5 8 10 23

20 3 7 0 10

10 0 6 0 6
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 Producer A’s Supply Curve Of
Pizza SS
Y
P
R
I
C
P1
E

X
O Q Q1
Quantity Supplied 8
Exceptions to the Law of Supply
Backward Bending Supply Curve.
Y SS
W
A c
G w”
E
R b
w’
A
T
E

w a

S
X
O L L” L’
No. of Laborers 9
Exceptions to the Law of
Supply:
Land, Rare paintings or antics
Y

P
R SS
I
C P”
E

P’

X
O Q Land
10
Other exceptions to the law of
supply:
Perishable goods
Agriculture goods
Goods for auction
Disposal of stock
Backward countries resources
are limited or unexplored.

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Change in Quantity supplied

Expansion in Supply
Contraction in Supply

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 Change in Quantity supplied
PR Y
SS
I
CE
P” c

P b Expansion

P’ a

Contraction

X
O Q’ Q Q”
Quantity Supplied 13
Changes in Supply

Increase in Supply
Decrease in Supply

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Changes in Supply
Y
PR SS”
SS
I
SS’
CE
Decrease

P Increase

X
O Q” Q Q’
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QUANTITY SUPPLIED
Elasticity of Supply
“… defined as the degree of
responsiveness of the quantity supplied due to
the change in price.”

Percentage change in the quantity supplied

Es= --------------------------------------------------
Percentage change in the price

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Measurement of Elasticity of
Supply

Qs P
Es = x
P Qs

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 Types of elasticity of Supply

Perfectly elastic (Es=∞)

Relatively elastic (Es>1)
Perfectly inelastic (Es=0)
Relatively inelastic (Es<1)
Unitary elastic (Es=1)

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 Types of elasticity of Supply
Y
es = 0 es < 1
es = 1
P
R
es > 1
I
C
E

es = ∞

X
O
QUANTITY SUPPLIED 19
Factors affecting elasticity of
supply
(1) Nature of the Product :
Perishable - Inelastic
Durable – Elastic
(2) Time Period :
Market Period – Perfectly inelastic
Short Period – Inelastic
Long Period – Elastic

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Factors affecting elasticity of
supply
(3) Scale of Production :
Small Scale – Inelastic
Large Scale – Elastic

(4) Technique of Production :

Labor Intensive – Inelastic
Capital Intensive -- Elastic

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Factors affecting elasticity of
supply
(5) Natural factors –
Good Rainfall – Elastic
Bad Rainfall – Inelastic

(6) Mobility of Factors :

High degree of mobility – Elastic
Low degree of mobility – Inelastic

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“No-Case-on-the –Table” Principle

Equilibrium

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Market Demand and Supply
Equilibrium of Pizza
Price (Rs.) Quantity Quantity
Supply (QS) Demanded
(QD)
6 8000 2000

5 6000 3000

4 4000 4000

3 2000 5000

2 0 6000 24
 Equilibrium
Y SS
DD
P
R SURPLUS
I
C SS > DD
E
5

E
4

X
O 4000
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QUANTITY DEMANDED AND SUPPLIED
 Equilibrium
Y SS
DD
P
R
I
C
E

E
4
3

Shortage
DD>SS
X
O 4000
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QUANTITY DEMANDED AND SUPPLIED
 Equilibrium
Y

P DD’ SS
R
I DD
DD”
C
E
E’
P’
E
P
E”
P”

X
O Q” Q Q’
QUANTITY DEMANDED AND SUPPLIED 27
 Equilibrium
Y DD
SS”
P
R SS
I SS’
C
E
E”
P” E
P E’
P’

O Q” Q Q’ X
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QUANTITY DEMANDED AND SUPPLIED