Supply Analysis and

Elasticity of Supply

1. Sourav Kumar Ray 16MBA046

2. Aparupa Ananda Mohanty 16MBA047
3. Vikash Rout 16MBA048
4. Joyti ranjan 16 MBA049
5. Biswajit Dhal 16MBA050
 DEFINITION
 As the term ‘demand’ refers to the
quantity of a good or service that the
consumers are willing and able to
purchase at various prices during a
given period of time, the term ‘supply’
refers to
the amount of a good or service that the
producers are willing and able to offer
to the market
at various prices during a period of
time.
Two important points apply
to supply :
(i) Supply refers to what firms
offer for sale, not necessarily to
what they succeed in selling .
(ii) Supply is a flow. The quantity
supplied is ‘so much’ per unit of
time, per day, per week, or per
year .

 Features Of Supply :
 Supply is always expressed in terms of price.
 Supply is a flow because it is measured over a period of time
 Individual supply schedule
 Def. It is defined as a table
which shows various quantity of
commodity. which an individual
producer offers for sale during a
given period of time at, different
prices
 Market supply schedule
 Def. It is a table which shows
various quantity of commodity
that all the firms are willing to
supply at each market price
during a given period of time
 The fundamental principle of Law Of Supply 12

is that - Supply of any commodity is directly

proportional to Price of that commodity. 10

 That means, as the price of a good increases, 8

suppliers will attempt to maximize profits by

Price Of Units
increasing the quantity of the product sold. 6

₰ Note : 4

≡ Main assumption of law of supply is cetris

paribus i.e. other things remaining the same. 2

≡ Other assumptions are

≡ (i) price of related goods should remain same 0

1000
100

200

300

400

500

600

700

800

900
≡ (ii) goal of the firm should not change, (iii)
Supply Units
input prices & taxation policies should remain
same.
 Price of the goods
 Price of related goods
 Goals of the firm
 Input price/ factor price/ cost of
production
 State of technology
 No. of producers
 Future expectations regarding
change in price
 Govt. policies ,Taxes & subsides
 others
1 . Price of the goods: Other things being equal, the higher the relative price of a good the
greater the quantity of it that will be supplied. This is because goods and services are
produced by the firm in order to earn profits and, ceteris paribus, profits rise if the price of
its product rises.

2 . Prices of related goods : If the prices of other goods rise, they become relatively more
profitable to the firm to produce and sell than the good in question. It implies, that, if the
price of Y rises, the quantity supplied of X will fall. For example, if price of wheat rises, the
farmers may shift lands to wheat production and away from corn and soyabeans.

3 . Prices of factors of production : A rise in the price of a particular factor of production will
cause an increase in the cost of making those goods that use a great deal of that factor
than in the costs of producing those that use relatively small amount of the factor. For
example, a rise in the cost of land will have a large effect on the cost of producing wheat
and a very small effect on the cost of producing automobiles. Thus, a change in the price
of one factor of production will cause changes in the relative profitability of different lines
of production and will cause producers to shift from one line to another and thus supplies
of different commodities will change.
4 . State of technology : The supply of a particular product depends upon the state of
technology also. Inventions and innovations tend to make it possible to produce more or
better goods with the same resources, and thus they tend to increase the quantity supplied
of some products and to reduce the quantity supplied of products that are displaced.

5 . Government Policy : The production of a good may be subject to the imposition of

commodity taxes such as excise duty, sales tax and import duties. These raise the cost of
production and so the quantity supplied of a good would increase only when its price in
the market rises. Subsidies, on the other hand, reduce the cost of production and thus
provide an incentive to the firm to increase supply.

6 . Other Factors : The quantity supplied of a good also depends upon government’s industrial
and foreign policies, goals of the firm, infrastructual facilities, market structure, natural
factors etc
 SUPPLY FUNCTION

it is a functional relationship between supply & it’s determinants.

Mathematically we can represent it as follows
Q.Sx= f(P, Py, T,Pi,G,………..)
Where Q.Sx= quantity supplied of commodity X,
P=price of commodity X,Py=price of related good Y,
T=state of technology,Pi=prices of inputs & G=goals or objectives
of the firm.
ж Def. Change in the supply means change in total, shift of supply curve
takes place due to change in the factors other than the product price.
There are two types of movement.
(a) Increase (b) Decrease
When the supply of a commodity When the supply of the commodity
increases. due to favorable changes decreases due to some unfavorable
in factors other than the price of the changes in the factors other than the
product it is called increase in price of the goods the supply curve
supply. In such a case there is a shifts to the left ward
rightward shift of the supply curve

Y S2 S
Y S S1
Price
Price

P
P
S2
S
S1 S

Increases Decrease

O Q Q1 X Qty O Q Q1 X Qty
ж Def. Change in quantity supplied due to change of the price in same
given supply curve of the commodity.
There are two types of movement of it.

(a) Extension (b) Contraction

refers to increase in quantity refers to decrease in quantity

supplied due to rise in the price of supplied due to fall in the price of
good. It is an upward movement on good. It is an downward movement
the same supply cure on the same supply cure
Y S

Price P3

Extension

P1

P2

S
Contraction

O Q2 Q1 Q3 X Qty
 price &quantity relationship- as
far as ceteris paribus is
concerned price & quantity
supplied have positive relation
due to the fact that producers
have the objective of profit
maximization so at a given cost
per unit of output the producer
will have more incentive to
supply more at a higher price.
 Rise in price of other good-if the
price of good Y rises in
comparison to good X then the
producer will have more
incentive on producing the
former so he will devote more of
his resources for it’s production.
Law of diminishing marginal returns-this law
states that in the short run if we go on
increasing a factor of production by keeping
other factors of production constant then
the marginal(incremental) output will
decrease per unit of input , as a result of
which the average and marginal cost of
production will rise thereby inducing
producer to produce more of goods at a
higher price to cover it’s additional costs.
For e:g consider a small cafe which has
fixed resources(capital) if we go on
increasing the no of workers no doubt the
production will increase initially, but at
some point of time each succeeding worker
will contribute less than his previous one, NOTE: this law only
this is because as we go on increasing the operates in short-run ,in
no.of workers due to limited resources each the long-run all factors of
worker tries to get in others way and the production are variable.
overall efficiency of each succeeding worker
becomes less than his previous one thereby
contributing less and hence the average &
marginal cost of production rises.
The law of supply does not operate in certain
kind of goods
1-products which are fixed in supply e:g rare-
paintings, antiques , old-age coins.
2-agricultural produce- crops or vegetables which
are cultivated in a particular season like paddy
in monsoon.
3-prestige goods-high fashioned luxury items
meant for special class of people.
4-speculation-in case of speculation the law fails
to operate as the speculator in case of rising
market does not sell his stock even if the prices
are rising as because he thinks that the prices
will still rise in near future.
  There are two exceptions to law of supply. They are,

(a) A Vertical Straight Line (b) Backward Sloping Curve

Supply Curve
This type of supply curve might occur in
It happens in the case of highly the case of Laborers in terms of no of
perishable commodity. supply for which hours worked. In this case to some
cannot he increased or decreased due to extent supply of Laborer increases with
their highly perishable nature for increase in the wages but after a certain
example- fish, milks and milk products, point supply of Labor starts decreasing
leafy vegetables etc. even if the wages are increasing
1.
Y S
S Y
Price
Wages W5
P3
W4
P2
W3
P1
W2
P
W1
S
O Q X Qty O X Laboures
L5 L1 L2 L3
 ELASTICITY OF SUPPLY

The elasticity of supply is defined as the responsiveness of the

quantity supplied of a good to a change in its price. Elasticity of
supply is measured by dividing the percentage change in quantity
supplied of a good by the percentage change in its price.

Two important points apply to supply :

(i) Supply refers to what firms offer for sale, not necessarily to what they succeed in
selling. What is offered may not get sold.

(ii) Supply is a flow. The quantity supplied is ‘so much’ per unit of time, per day, per
week, or per year.
 Law of supply tells us that producers will respond to a price drop
by producing less, but it does not tell us how much less. The
degree of sensitivity of producers to a change in price is
measured by the concept of price elasticity of supply.

 Price elasticity of supply is the percentage change in quantity

supplied resulting from a percent change in price.

 It is a measure of how much the quantity supplied of a good

responds to a change in the price of that good.

 The elasticity of supply is the same basic formula as the demand

elasticity, but looks at the percentage change in quantity supplied
instead of percentage change in quantity demanded.

Percentage Change in Quantity Supply

Price Elasticity of Supply =
Percentage Change in Price
  If percentage change is not available then:-
Percentage Change in Qs 
Q1  Q2  Where Q1 = initial Qs, and Q2 = new Qs.
1 Q1  Q2 
2
Percentage Change in Price 
P1  P2  Where P1 = initial Price, and P2 = New Price.
1 P1  P2 
2
 Putting both the equation together then,
Q1  Q2 
1 Q1  Q2 
Es  2
P1  P2 
1 P1  P2 
2
 Example
1. If the quantity supplied of Product B has decreased from 1000
units to 200 units as price decreases from $4 to $2 per unit,
the coefficient for Es is:

 Es = {(Q1-Q2) / [1/2 (Q1+Q2)] } / {(P1-P2) / [1/2 (P1 + P2)]} =

{(1000 - 200) / 1/2(1000 + 200)} / {(4-2) / 1/2 (4+2)} = 2
.

Type of Supply Elasticity : The elasticity of supply can

be classified as under :

1 . Perfectly inelastic supply : If as a result of a change in price, the quantity

supplied
Of a good remains unchanged, we say that the elasticity of supply is zero or the
Goods has perfectly inelastic supply.

2. Relatively less-elastic supply : If as a result of a change in the price of a

goods is supplied changes less than proportionately, we say that the supply
of the goods is relatively less elastic or elasticity of supply is less than one.

i 3 Relatively greater-elastic supply : If elasticity of supply is greater than one .

when the quantity supplied of a good changes substantially in response to a
small change in the price of the good we say that supply is relatively elastic.
equal to the relative change in the price (Δp).

4 Unit-elastic : If the relative change in the quantity supplied is exactly

equal to relative change in the price, the supply is said to be unitary elastic.
Here the coefficient of elasticity of supply is equal to one

5 Perfectly elastic supply : Elasticity of supply said to be infinite when

nothing is supplied at a lower price but a small increase in price causes
supply to raise from zero to infinity large amount indicating that
producers will supply any quantity demanded at that price.
1 .Perfectly Elastic
ES = 
2 .Relatively Elastic
ES > 1
3 .Unit Elastic
ES = 1
4 .Relatively Inelastic
ES < 1
5 .Perfectly Inelastic
ES = 0
1. Perfectly Inelastic Supply - Elasticity equals 0
Price Supply 1. An increase in price...

$10 2. ...leaves the quantity

supplied unchanged.
$5

100 Quantity

2 .Inelastic Supply- Elasticity is less than 1

Price 1. A 22 % increase in price...
Supply

$
5 2. ...leads to 10% increase in
Quantity.
$4

100 Quantity
110
3. Unit Elastic Supply - Elasticity equals 1

Price 1. A 25 % increase in price...

$5
2. ...leads to a 25% increase
$4 in Quantity.

100 125 Quantity

4 .Elastic Supply - - Elasticity is greater than 1

Price 1. A 22 % increase in price...

$5 2. …leads to a 67% increase

in Quantity.
$4

100 167 Quantity

5 .Perfectly Elastic Supply - Elasticity equals infinity

Price
1. At any price
above $4, quantity
supplied is infinite.

$4 Supply

2. At exactly $4,
producers will
supply any quantity.

3. At a price below $4, Quantity

Quantity supplied is zero.
 The following list contains the main determinants of supply
elasticity.
1. Product Type
2. Time
3. Production Capacity
4. Input substitution -- Flexibility and Mobility
 Product Type - The type of product impacts how quickly a
producer is able to respond to a change in price. A manufacturing
firm may be able to quickly adjust production levels with only
minor adjustments in the equipment while other products such as
apples require several years to establish a new orchard. Since
child care services requires relatively few skills compared to the
those of a physician, the supply elasticity of child care services is
more elastic than that of physician services.
 Time - Time is a key determinant of supply. In the case of apples
and some other agriculture products, the immediate elasticity of
supply is very inelastic, i.e., there are only so many apples
available for sale today. However, with time producers are able to
respond to the increase in price, manufacturing firms can build
 Production Capacity - If a firm is already operating at full
capacity, then to increase supply would require building
additional facilities and purchasing new equipments. A firm that
is operating at below full capacity, can respond to a price
increase quicker than a firm that is already at full capacity.
 Input substitution -- Flexibility and Mobility
 Another determinant in the elasticity of supply is input
substitution. As the price of a good increases, how easily can
inputs that were used in the production of another good be
switched over to producing the good with the higher price?
Short run
P Intermediate
run
Long run

Q
Time Period In Case Of Supply

Y S

Price P3 Y S

Price

P1 S

O X Qty
P2

O Q X Qty
Supply = Constant, Supply Curve Is Supply Curve In This Case Will Be
Straight Line
Very From
Short X-Axis
Period Upward Sloping Originating From X –
Short Period
Example : All Perishable Goods Axis.
Example : Fruits, Vegetables, Bakery
Products
 (i)

Y S

Y Price

Price ` S

S S

O X Qty O X Qty

Supply Curve In This Case Will Be Supply Curve In This Case Is Almost A
Upward Sloping, Originating
Long Period From Y – HorizontalVery
Straight
LongLine Originating From
Period
Axis Y – Axis.
Examples : Clothes, Utensils Etc. Example : Electronic Goods, Furniture Etc.
.

Equilibrium Price
Equilibrium refers to a market situation where
quantity demanded is equal to quantity supplied.
The intersection of demand and supply
determines the equilibrium price. At this price the
amount that the buyers want to buy is equal to
the amount that sellers want to sell. Only at the
equilibrium price, both the buyers and sellers are
satisfied. Equilibrium price is also called Market
clearing price
PRICE QNT QNT Impact on
Demanded Supplied price
5 16 31 down
4 12 25 down
3 19 19 Equilibrium

2 25 12 up
1 31 16 up
 Y

S
D
EQUILIBRIUM PRICE

3 E
Price

S D
O 19 X
Quantity

The equilibrium price is determined by the intersection

between demand and supply. It is also
called the market equilibrium.
Any Q’ns ?? Thank You !!!