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Theory of Supply: AHSEC Class 11 Economics notes
Get summaries, questions, answers, solutions, notes, extras, PDF and guide of Class 11 (first year) Economics textbook, chapter 9 Theory of Supply which is part of the syllabus of students studying under AHSEC/ASSEB (Assam Board). These solutions, however, should only be treated as references and can be modified/changed.
If you notice any errors in the notes, please mention them in the comments
Summary
The chapter on the theory of supply focuses on how sellers behave in a market. It begins by defining supply as the amount of a commodity a seller is willing to offer at a given price during a specific time period. This willingness to sell can differ from the actual quantity sold. Supply is directly linked to the price of a commodity and is expressed as a flow over time, such as per day or per year. A distinction is made between “supply,” which refers to the amount a seller is prepared to sell, and “stock,” which is the total available quantity.
Next, the chapter explains the difference between individual and market supply. Individual supply refers to the quantity a single seller is willing to offer, while market supply is the combined quantity all sellers are ready to provide. The chapter uses an example of three firms producing sugar at different quantities to show how market supply is the sum of individual contributions.
Various factors influence supply. The most important is the commodity’s price: higher prices lead to more supply as sellers expect higher profits. Other factors include the prices of related goods, input costs, technology improvements, and government policies like taxes and subsidies. The goals of the firm also matter. Some firms may aim for profit, while others focus on sales or reducing risks.
The law of supply states that the quantity supplied increases when the price rises, assuming other conditions remain the same. The chapter highlights exceptions to this law, such as when sellers expect future price changes or deal in perishable goods, which must be sold quickly, regardless of price.
Also, the chapter discusses price elasticity of supply, which measures how much supply responds to changes in price. Elastic supply means even a small price change leads to a large change in quantity supplied. Conversely, inelastic supply indicates that price changes have little effect on supply. Various methods, such as percentage and geometric methods, help measure this elasticity.
Textbook solutions
Very Short Answer Type Questions
1. Define supply.
Answer: Supply refers to the quantity of a commodity that a firm is willing and able to offer for sale at a given price during a given period of time.
2. Define market supply of a good.
Answer: Market supply refers to the quantity of a commodity that all firms are willing and able to offer for sale, at each possible price during a given period of time.
3. State any two factors determining supply.
Answer:
- Commodity’s Own Price: The higher the price, the larger will be the supply.
- Prices of Other Goods: The supply of a commodity also depends upon the prices of other goods.
4. Define supply function.
Answer: The supply function states the functional relationship between the quantity supplied of a commodity and its determinants. It may be written as:
S₁ (x) = f (P).
(Here, S = Supply of commodity X; f = Functional relation; P = Price of commodity X)
5. What is the shape of a supply curve?
Answer: The shape of a supply curve is upward sloping, indicating that as price increases, the quantity supplied also increases.
6. What is a supply schedule?
Answer: A supply schedule is a table that shows the relationship between the price of a commodity and the quantity of the commodity that a producer is willing to supply.
7. State the law of supply.
Answer: The law of supply states that, other things being equal, the quantity supplied of a commodity rises directly with its price.
8. When is the supply curve of a firm a vertical straight line parallel to the X-axis?
Answer: The supply curve of a firm is a vertical straight line parallel to the X-axis when the supply is perfectly inelastic.
9. What is meant by change in supply?
Answer: Change in supply refers to an increase or decrease in the supply of a commodity due to factors other than its own price. These factors can include changes in input prices, technology, number of firms, government policies, and expectations of future prices.
10. What is meant by change in quantity supplied?
Answer: Change in quantity supplied refers to a movement along the supply curve due to a change in the commodity’s own price, keeping other factors constant.
11. What effect does an increase in input price have on supply curve?
Answer: An increase in input price shifts the supply curve to the left, as it increases the marginal cost of production, leading producers to supply less at the same price level.
12. What causes a movement along a supply curve of a good?
Answer: A movement along a supply curve of a good is caused by a change in the price of the good itself.
13. What is meant by extension of supply?
Answer: Extension of supply refers to an increase in the quantity supplied due to a rise in the price of the commodity, which leads to a movement along the supply curve.
14. What is meant by contraction of supply?
Answer: Contraction of supply refers to a decrease in the quantity supplied due to a fall in the price of the commodity, which leads to a movement along the supply curve.
15. Define increase in supply.
Answer: Increase in supply refers to a situation where more quantity of a commodity is supplied at the same price due to factors such as improvement in technology, reduction in input costs, or favorable government policies. It leads to a rightward shift in the supply curve.
16. Define decrease in supply.
Answer: Decrease in supply refers to a situation where less quantity of a commodity is supplied at the same price due to factors like a rise in input costs, adverse government policies, or reduction in the number of firms. It leads to a leftward shift in the supply curve.
17. What causes a downward movement along a supply curve?
Answer: Decrease in price .
18. What causes an upward movement along the supply curve of a commodity?
Answer: Increase in price .
19. If a farmer grows rice and wheat, how will an increase in the price of wheat affect the supply curve of rice?
Answer: The supply of rice will decrease as the farmer shifts resources to growing more wheat, which has become more profitable due to the price increase .
20. What is meant by price elasticity of supply?
Answer: Price elasticity of supply means the degree of responsiveness of supply of a commodity due to change in its price. It is measured as:
Price elasticity of supply = Percentage change in quantity supplied / Percentage change in price .
21. How is elasticity of supply measured?
Answer: Elasticity of supply is measured using the following formula:
Price elasticity of supply = Percentage change in quantity supplied / Percentage change in price .
22. Draw a supply curve with unitary elasticity.
Answer: A straight-line supply curve passing through the origin indicates unitary elasticity. This means the percentage change in quantity supplied equals the percentage change in price .
23. Price elasticity of supply of a good is 0.8. Is the supply ‘elastic’ or ‘inelastic’, and why?
Answer: The supply is inelastic because the value of price elasticity of supply is less than one .
Short Answer Type Questions
1. Distinguish between supply and stock.
Answer: Supply refers to the quantity of a commodity that producers are willing to offer for sale at different prices during a given period, while stock refers to the total quantity of a commodity available with the producers for sale at any given time.
2. State any three factors affecting supply of a commodity.
Answer:
- Price of the commodity: A higher price usually results in a greater quantity supplied.
- Prices of other related goods: The supply of a commodity may be influenced by changes in the prices of other goods, especially substitute products.
- State of technology: Technological advancements can reduce production costs and increase supply.
3. Explain how the supply of a commodity is affected by the prices of other related commodities. (or) Explain the effect of fall in prices of other goods on the supply of a given good.
Answer: The supply of a commodity is affected by the prices of other related commodities, particularly substitute goods. If the price of a related good (such as a substitute) increases, producers may shift their resources towards producing the more profitable good. This will reduce the supply of the given commodity. Conversely, if the price of a related good falls, producers will find it less profitable to produce that good and may increase the supply of the given commodity instead.
For example, if a farmer grows both wheat and rice, and the price of rice increases, the farmer may allocate more land to growing rice, thus reducing the supply of wheat. Similarly, if the price of rice falls, the farmer may decide to produce more wheat, increasing its supply.
4. Define market supply. What is the likely effect on the supply of a good if a unit tax is imposed on that good? Explain.
Answer: Market supply refers to the total quantity of a good that all producers in the market are willing to offer at various prices during a given period. If a unit tax is imposed on a good, the cost of production increases, leading to a decrease in supply as producers will offer less at the same price.
5. What is a supply schedule? What is the effect on the supply of a good when Government gives a subsidy on the production of that good? Explain.
Answer: A supply schedule is a table that shows the relationship between the price of a commodity and the quantity supplied. If the government provides a subsidy on the production of a good, it reduces the cost of production, which typically increases supply since producers are willing to supply more at the same price.
6. What is supply? How does the state of technology affect it? (or) Explain the role of technical progress as a determinant of firms supply curve.
Answer: Supply is the amount of a commodity that a seller (or a firm) is willing to sell in a market at a given price in a given period of time. Technological progress reduces the marginal cost of production, allowing firms to produce more with the same or fewer resources. This increase in efficiency shifts the supply curve to the right, indicating an increase in the quantity supplied at the same price.
7. Explain the effect of the following on supply of a commodity: (a) Fall in the prices of factor inputs (b) Rise in the prices of other commodities.
Answer: (a) Fall in the prices of factor inputs: A fall in the prices of factor inputs reduces the cost of production, making it more profitable for firms to supply more at the same price. This leads to an increase in supply, causing a rightward shift of the supply curve. (b) Rise in the prices of other commodities: A rise in the prices of other commodities can make their production more attractive to firms. As a result, firms may divert resources to produce these other commodities, reducing the supply of the current commodity and causing a leftward shift of the supply curve.
8. Explain the meaning of ‘increase in supply’, and increase in quantity supplied with the help of a schedule.
Answer: Increase in supply refers to a situation where the supply of a commodity rises due to a change in factors other than its own price. This results in a rightward shift of the supply curve. Increase in quantity supplied refers to a rise in the amount of a commodity offered for sale as a result of an increase in its own price, represented as a movement along the supply curve.
Example schedule:
| Price per unit (₹) | Quantity Supplied (Units) |
|---|---|
| 10 | 100 |
| 10 | 120 |
In the example, the quantity supplied increases from 100 units to 120 units without a change in price, indicating an increase in supply.
9. State any three causes of a leftward shift of supply curve? (or) State any three causes of decrease in supply.
Answer: Three causes of a leftward shift of the supply curve (decrease in supply) are:
- Increase in the price of inputs: When input costs rise, the cost of production increases, leading to a decrease in supply.
- Imposition of higher taxes: Higher taxes raise production costs, reducing the profitability and resulting in a decrease in supply.
- Adverse government policies: Government regulations or restrictions, such as trade barriers, can reduce the supply of a commodity.
10. Give three causes of an increase in the supply of a commodity? (or) State any three causes of a rightward shift of supply curve.
Answer: Three causes of an increase in the supply of a commodity (rightward shift of the supply curve) are:
- Improvement in technology: Technological advancements reduce production costs, allowing firms to supply more at the same price.
- Decrease in the price of inputs: When input prices fall, production becomes cheaper, leading to an increase in supply.
- Government subsidies: When the government provides subsidies, production costs decrease, encouraging firms to supply more at the same price.
11. Explain the effect of change in price of inputs used on the supply of a product.
Answer: A firm uses different inputs like raw materials, machines, etc., in its production process. If the prices of these inputs increase, then the profitability of the firm will fall. In such a case, the firm will supply less than before at the prevailing price level. On the other hand, if there is a fall in input prices, then the possibility to earn profit increases. So in that situation, the firm will be willing to supply more than before. Thus, changes in the prices of inputs influence the supply of a product in the market.
12. Explain the law of supply with the help of a supply schedule.
Answer: A supply schedule is a tabular statement showing various quantities which producers are willing to produce and sell at various alternative prices during a given period of time. It states the relationship between the price of a commodity and the quantity that would be supplied. The individual supply schedule for any product indicates different quantities supplied per period by the producer at different possible prices of that commodity.
Example:
| Price per unit (₹) | Quantity supplied of X per month (Units) |
|---|---|
| 2 | 20 |
| 3 | 40 |
| 4 | 60 |
| 5 | 80 |
| 6 | 100 |
This table clearly shows that more quantity of commodity X is being offered for sale as the price of the commodity increases and vice versa.
13. State the law of supply. What is meant by the assumption ‘others remaining the same’?
Answer: The law of supply states that, other things being equal, the quantity supplied of a commodity rises directly with its price. In other words, when the price of a commodity rises, the quantity supplied increases, and when the price falls, the quantity supplied decreases, other things remaining the same.
The assumption “others remaining the same” refers to the idea that all other factors affecting the supply, such as the prices of related goods, the state of technology, and the prices of inputs, remain unchanged.
14. What is meant by elasticity of supply? State the formula for measuring it.
Answer: Elasticity of supply refers to the degree of responsiveness of the quantity supplied to a change in the price of a product. It measures how much the quantity supplied of a commodity changes in response to a given percentage change in its price.
The formula for measuring elasticity of supply is:
Es = % change in quantity supplied / % change in price
Or,
Es = (ΔQ/Q) / (ΔP/P)
Where:
ΔQ = Change in quantity supplied
Q = Initial quantity supplied
ΔP = Change in price
P = Initial price
15. Draw straight line supply curves with price elasticity of supply:
(i) equal to one (ii) less than one (iii) more than one
Answer: (i) Equal to one: A straight-line supply curve passing through the origin represents unitary elasticity of supply. At all points along this curve, the percentage change in quantity supplied equals the percentage change in price.
(ii) Less than one: A steep straight-line supply curve that cuts the X-axis below the origin represents inelastic supply, where the percentage change in quantity supplied is less than the percentage change in price.
(iii) More than one: A flat straight-line supply curve that cuts the Y-axis above the origin represents elastic supply, where the percentage change in quantity supplied is greater than the percentage change in price.
Long Answer Type Questions
1. Explain any four determinants of the market supply of a commodity.
Answer:
- Commodity’s Own Price: Price of a commodity is the most important determinant of its supply. The higher the price, the larger will be the supply. The producers generally supply more quantity of a commodity at a higher price and vice-versa. This type of relationship between price and supply has been illustrated by the law of supply. At a higher price, the producer will be able to earn more profits and hence would be willing to sell more.
- Prices of Other Goods: The supply of a commodity also depends upon the prices of other goods. An increase in the prices of other goods makes their production more profitable for the producers. Therefore, they will increase their supply. On the other hand, the supply of the commodity the price of which has not changed will become relatively less profitable. The supply of such a commodity may decrease.
- Prices of Inputs: A firm uses different inputs like raw materials, machinery, etc., in its production process. If the prices of these inputs increase, then the profitability of the firm will fall. In such a case, the firm will supply less than before at the prevailing price level. On the other hand, if there is a fall in input prices, then the possibility to earn profit increases. So in that situation, the firm will be willing to supply more than before. Thus, changes in the prices of inputs influence the supply of a product in the market.
- State of Technology: If there is an improvement in production technology, then it may be possible for the firm to produce more with the given resources. In such a case, the average cost of production may fall and the firm may be willing to supply more at a given price. Hence, technological innovation plays a great role in raising the flow of supply of a product.
2. State and explain the law of supply with the help of a schedule and a diagram.
Answer: The law of supply states that other things being equal, the quantity supplied of a commodity rises directly with its price. In other words, when the price of a commodity rises, the quantity supplied increases, and vice versa, other things being equal. An important point to be noted here is that the relationship between price and quantity supplied is direct while the relationship between price and quantity demanded is inverse.
Supply Schedule: A supply schedule is a tabular statement showing various quantities that producers are willing to produce and sell at various alternative prices during a given period of time. It states the relationship between the price of a commodity and the quantity that would be supplied. The supply schedule is of two types:
- Individual Supply Schedule
- Market Supply Schedule
Example:
| Price per unit (₹) | Quantity supplied of X per month (Units) |
|---|---|
| 2 | 20 |
| 3 | 40 |
| 4 | 60 |
| 5 | 80 |
| 6 | 100 |
This table shows that as the price of the commodity increases from ₹2 to ₹6, the quantity supplied increases from 20 units to 100 units.
3. Distinguish between expansion of supply and increase in supply. Explain briefly.
Answer:
| Expansion of Supply | Increase in Supply |
|---|---|
| 1. It implies a change in quantity supplied due to a rise in the price of the commodity. | 1. It implies an increase in supply due to factors other than the price of the commodity. |
| 2. A movement along the supply curve indicates an expansion in supply. | 2. A rightward shift of the supply curve indicates an increase in supply. |
| 3. In this case, the supply curve remains unchanged, and the producer moves from one point to another along the same curve. | 3. In this case, the entire supply curve shifts to the right, implying that a greater quantity is supplied at each price. |
| 4. The supply increases as a result of a price increase for the same supply curve. | 4. The supply increases because of changes in factors like input prices, technology, etc. |
4. State the law of supply. What are the reasons for the upward slope of the curve?
Answer: The law of supply states that other things being equal, the quantity supplied of a commodity increases as the price increases, and decreases as the price decreases. In simple terms, there is a direct relationship between the price of a commodity and its quantity supplied.
Reasons for the upward slope of the supply curve:
- Profit Motive: As price increases, producers are motivated by the higher profits they can earn, thus increasing the quantity supplied.
- Law of Diminishing Marginal Returns: In the short run, as more units of a variable factor are employed to increase production, the additional output produced by the extra units falls, leading to an increase in marginal cost. As a result, producers supply more only at higher prices to cover the rising cost.
5. Distinguish between movements along a supply curve and shifts of the curve.
Answer:
| Movement along the Supply Curve | Shift of the Supply Curve |
|---|---|
| 1. It implies a change in quantity supplied due to a change in the commodity’s own price. | 1. It implies a change in supply (either an increase or a decrease in the supply) of a commodity at a given price. |
| 2. A movement from the left to the right along any supply curve indicates an expansion in quantity supplied due to an increase in the price of the commodity. | 2. A rightward shift of the supply curve implies an increase in supply at each possible price. |
| 3. A movement from the right to the left along the supply curve indicates a contraction in quantity supplied due to a fall in the price of the commodity. | 3. A leftward shift of the supply curve implies a decrease in supply at each possible price. |
| 4. Here, all other factors except the price of the commodity are assumed to remain unchanged. | 4. Here, given the price of the commodity, all other factors (such as input prices, technology, etc.) are assumed to be flexible. |
| 5. Here, the price of the commodity affects its quantity supplied. | 5. Here, supply affects the price. |
6. Explain any three causes of ‘Increase’ of supply of a commodity.
Answer: Three causes of an increase in supply are:
- Fall in input prices: When the prices of inputs used in the production of a commodity fall, the cost of production decreases, making it easier for producers to supply more of the commodity at the same price.
- Technological progress: Technological advancements can lead to more efficient production processes, reducing costs and enabling producers to increase the supply of the commodity.
- Government subsidies: When the government provides subsidies to producers, it reduces their cost of production, leading to an increase in supply as producers can offer more at the same or even lower prices.
7. Explain any two causes of ‘decrease’ in supply of a good.
Answer: Two causes of a decrease in supply are:
- Rise in input prices: An increase in the prices of inputs used in production raises the cost of production, causing producers to reduce the quantity they are willing to supply at the same price.
- Imposition of taxes: The imposition of taxes, such as excise or sales tax, increases the cost of production for producers, leading to a decrease in the quantity supplied at the same price.
8. Explain the distinction between change in quantity supplied and change in supply. Use diagram.
Answer:
- Change in quantity supplied: This refers to a movement along the same supply curve due to a change in the price of the commodity. When the price increases, there is an expansion in supply, and when the price decreases, there is a contraction in supply. This movement along the supply curve is caused only by a change in the commodity’s price, keeping other factors constant.
- Change in supply: This refers to a shift of the entire supply curve due to factors other than the commodity’s own price. An increase in supply is represented by a rightward shift of the supply curve, while a decrease in supply is shown as a leftward shift. The factors that can cause a shift in supply include changes in input prices, technological advancements, government policies, etc.
9. Define price elasticity of supply and explain its any two determinants.
Answer: Price elasticity of supply means the degree of responsiveness of supply of a commodity due to a change in its price. It is measured as:
Price elasticity of supply = (Percentage change in quantity supplied) / (Percentage change in price)
Two determinants of price elasticity of supply are:
- Nature of the commodity produced: Nature of the commodity is an important determinant of elasticity of supply. For instance, the supply of durable goods is relatively elastic. Durable goods can be stored and hence producers can meet their changing market demand by either running down their stocks or by building up stocks. On the other hand, the supply of perishable goods like milk, vegetables is relatively inelastic as these goods cannot be stored. Change in their supply has to be largely made through change in output only.
- Time period: Price elasticity of supply also depends upon the length of time for response. It may be difficult to change the quantity supplied in a few weeks or months in response to a price change but easy to do so over a period of a year. Therefore, supply tends to be relatively inelastic in the short period and relatively elastic in the long period.
10. Define price elasticity of supply. How can it be measured? Explain.
Answer: Price elasticity of supply is the degree of responsiveness of the quantity supplied of a commodity to a change in its price. It is calculated as:
Price elasticity of supply = (Percentage change in quantity supplied) / (Percentage change in price)
It can be measured using two methods:
- Percentage method: This method uses the formula mentioned above, where the percentage change in quantity supplied is divided by the percentage change in price.
- Geometric method: In this method, elasticity of supply is measured at a particular point on the supply curve by extending the supply curve to meet the axes. The price elasticity at any point is calculated as the ratio of the horizontal segment to the vertical segment between the point of intersection and the axes.
11. Explain the geometric methods of measuring elasticity of supply.
Answer: The geometric method of measuring elasticity of supply involves drawing a straight-line supply curve and determining elasticity at different points. The procedure is as follows:
- Zero elasticity: If the supply curve cuts the horizontal axis (quantity axis), the price elasticity of supply is less than one, meaning the supply is inelastic.
- Unitary elasticity: If the supply curve passes through the origin, the price elasticity of supply is equal to one, meaning that the percentage change in quantity supplied is equal to the percentage change in price.
- Infinite elasticity: If the supply curve intersects the vertical axis (price axis), the price elasticity of supply is greater than one, meaning the supply is elastic.
Numerical Questions
1. You are given the following information:
Price ( per unit) : 10 12 14 16 18 20
Supplied by Firm A (units) : 100 150 200 250 300 350
Supplied by Firm B (units) : 200 300 400 500 600 700
Assuming that there are only two firms in the market, compute market supply schedule.
Original Table:
| Price (per unit) | Supplied by Firm A (units) | Supplied by Firm B (units) |
|---|---|---|
| 10 | 100 | 200 |
| 12 | 150 | 300 |
| 14 | 200 | 400 |
| 16 | 250 | 500 |
| 18 | 300 | 600 |
| 20 | 350 | 700 |
Answer:
To calculate the market supply, we sum the quantities supplied by Firm A and Firm B for each price level:
For Price = 10: Market Supply = 100 (Firm A) + 200 (Firm B) = 300 units
For Price = 12: Market Supply = 150 (Firm A) + 300 (Firm B) = 450 units
For Price = 14: Market Supply = 200 (Firm A) + 400 (Firm B) = 600 units
For Price = 16: Market Supply = 250 (Firm A) + 500 (Firm B) = 750 units
For Price = 18: Market Supply = 300 (Firm A) + 600 (Firm B) = 900 units
For Price = 20: Market Supply = 350 (Firm A) + 700 (Firm B) = 1050 units
Updated Table:
| Price (per unit) | Supplied by Firm A (units) | Supplied by Firm B (units) | Market Supply (A+B) |
|---|---|---|---|
| 10 | 100 | 200 | 300 |
| 12 | 150 | 300 | 450 |
| 14 | 200 | 400 | 600 |
| 16 | 250 | 500 | 750 |
| 18 | 300 | 600 | 900 |
| 20 | 350 | 700 | 1050 |
2. Consider a market with two firms in the following table. Columns labelled as SS₁ and SS₂ give the supply of firm 1 and firm 2 respectively. Compute the market supply schedule.
Original Table:
| Price (₹) | SS₁ (Kg) | SS₂ (Kg) |
| 2 | 0 | 0 |
| 3 | 1 | 2 |
| 4 | 2 | 3 |
| 5 | 3 | 4 |
| 6 | 4 | 5 |
| 7 | 5 | 6 |
| 8 | 6 | 7 |
| 9 | 7 | 8 |
Answer:
To compute the market supply, we add SS₁ and SS₂ for each price level:
For Price = 2: Market Supply = 0 (SS₁) + 0 (SS₂) = 0 Kg
For Price = 3: Market Supply = 1 (SS₁) + 2 (SS₂) = 3 Kg
For Price = 4: Market Supply = 2 (SS₁) + 3 (SS₂) = 5 Kg
For Price = 5: Market Supply = 3 (SS₁) + 4 (SS₂) = 7 Kg
For Price = 6: Market Supply = 4 (SS₁) + 5 (SS₂) = 9 Kg
For Price = 7: Market Supply = 5 (SS₁) + 6 (SS₂) = 11 Kg
For Price = 8: Market Supply = 6 (SS₁) + 7 (SS₂) = 13 Kg
For Price = 9: Market Supply = 7 (SS₁) + 8 (SS₂) = 15 Kg
Updated Table:
| Price (₹) | SS₁ (Kg) | SS₂ (Kg) | Market Supply (SS₁ + SS₂) |
| 2 | 0 | 0 | 0 |
| 3 | 1 | 2 | 3 |
| 4 | 2 | 3 | 5 |
| 5 | 3 | 4 | 7 |
| 6 | 4 | 5 | 9 |
| 7 | 5 | 6 | 11 |
| 8 | 6 | 7 | 13 |
| 9 | 7 | 8 | 15 |
3. There are three identical firms in a market. The following table shows the supply schedule of firm 1: Complete the market supply schedule:
Original Table:
| Price (₹) | SS₁ (Kg) |
| 1 | 0 |
| 2 | 0 |
| 3 | 2 |
| 4 | 5 |
| 5 | 10 |
| 6 | 15 |
| 7 | 20 |
| 8 | 25 |
Answer: Since there are three identical firms, the market supply will be three times the individual supply of Firm 1 at each price level.
For Price = 1: Market Supply = 3 × 0 = 0 Kg
For Price = 2: Market Supply = 3 × 0 = 0 Kg
For Price = 3: Market Supply = 3 × 2 = 6 Kg
For Price = 4: Market Supply = 3 × 5 = 15 Kg
For Price = 5: Market Supply = 3 × 10 = 30 Kg
For Price = 6: Market Supply = 3 × 15 = 45 Kg
For Price = 7: Market Supply = 3 × 20 = 60 Kg
For Price = 8: Market Supply = 3 × 25 = 75 Kg
Updated Table:
| Price (₹) | SS₁ (Kg) | Market Supply (3 × SS₁) |
| 1 | 0 | 0 |
| 2 | 0 | 0 |
| 3 | 2 | 6 |
| 4 | 5 | 15 |
| 5 | 10 | 30 |
| 6 | 15 | 45 |
| 7 | 20 | 60 |
| 8 | 25 | 75 |
4. Price of a commodity falls by 10%. As a result, its supply falls by 15%. Find out elasticity of supply. State whether supply is elastic or inelastic.
Answer: Elasticity of supply (e) is calculated using the formula:
e = (%Δ in supply) ÷ (%Δ in price)
Given:
%Δ in price = -10%
%Δ in supply = -15%
So,
e = (-15%) ÷ (-10%) = 1.5
Since elasticity of supply is greater than 1, the supply is elastic.
5. Calculate elasticity of supply from the following data:
| Price (per kg) | Supply (in kg) |
|---|---|
| 10 | 1000 |
| 12 | 1500 |
Answer: Elasticity of supply (e) is calculated using the formula:
e = (%Δ in supply) ÷ (%Δ in price)
%Δ in price = (12 – 10) ÷ 10 × 100 = 20%
%Δ in supply = (1500 – 1000) ÷ 1000 × 100 = 50%
So,
e = 50% ÷ 20% = 2.5
6. If the market price of a commodity is ₹4, seller is willing to sell 600 units of the commodity. When the price rises to ₹5, he is willing to sell 750 units of the commodity. What is the seller’s elasticity of supply?
Answer: Elasticity of supply (e) is calculated using the formula:
e = (%Δ in supply) ÷ (%Δ in price)
%Δ in price = (5 – 4) ÷ 4 × 100 = 25%
%Δ in supply = (750 – 600) ÷ 600 × 100 = 25%
So,
e = 25% ÷ 25% = 1
The elasticity of supply is unitary elastic.
7. If the price of a commodity falls from ₹60 per unit to ₹58 per unit, its supply contracts from 400 units to 300 units. Find out its elasticity of supply.
Answer: Elasticity of supply (e) is calculated using the formula:
e = (%Δ in supply) ÷ (%Δ in price)
%Δ in price = (58 – 60) ÷ 60 × 100 = -3.33%
%Δ in supply = (300 – 400) ÷ 400 × 100 = -25%
So,
e = (-25%) ÷ (-3.33%) = 7.5
8. As a result of a 10% fall in price of a commodity, its supply decreases from 80 units to 60 units. Find out elasticity of supply.
Answer: Elasticity of supply (e) is calculated using the formula:
e = (%Δ in supply) ÷ (%Δ in price)
%Δ in price = -10%
%Δ in supply = (60 – 80) ÷ 80 × 100 = -25%
So,
e = (-25%) ÷ (-10%) = 2.5
The elasticity of supply is elastic.
9. The price of a commodity rises from ₹5 per unit to ₹6 per unit. Consequently, its supply increases by 20%. Find out elasticity of supply.
Answer: Elasticity of supply (e) is calculated using the formula:
e = (%Δ in supply) ÷ (%Δ in price)
%Δ in price = (6 – 5) ÷ 5 × 100 = 20%
%Δ in supply = 20%
So,
e = 20% ÷ 20% = 1
The elasticity of supply is unitary elastic.
10. The quantity supplied of a commodity at a price of ₹8 per unit is 400 units. Its price elasticity of supply is 2. Calculate the price at which its quantity supplied will be 600 units.
Answer: Elasticity of supply (e) is calculated using the formula:
e = (%Δ in supply) ÷ (%Δ in price)
Given e = 2, initial price P₁ = ₹8, initial quantity Q₁ = 400 units, final quantity Q₂ = 600 units.
%Δ in supply = (600 – 400) ÷ 400 × 100 = 50%
Now,
e = 50% ÷ %Δ in price = 2
%Δ in price = 50% ÷ 2 = 25%
So,
%Δ in price = (P₂ – 8) ÷ 8 × 100 = 25%
P₂ = 8 + 2 = ₹10
The price at which the quantity supplied will be 600 units is ₹10 per unit.
11. At a price of ₹8 per unit, the quantity supplied of a commodity is 200 units. Its price elasticity of supply is 1.5. If its price rises to ₹10 per unit, calculate its quantity supplied at this new price.
Answer:
Elasticity of supply (e) is calculated using the formula:
e = (%Δ in supply) ÷ (%Δ in price)
Given:
e = 1.5,
Initial price (P₁) = ₹8,
Final price (P₂) = ₹10,
Initial quantity supplied (Q₁) = 200 units.
First, calculate %Δ in price:
%Δ in price = ((10 – 8) ÷ 8) × 100 = 25%
Now, %Δ in supply = e × %Δ in price
%Δ in supply = 1.5 × 25% = 37.5%
Now, calculate the change in quantity supplied:
ΔQ = Q₁ × (%Δ in supply ÷ 100)
ΔQ = 200 × (37.5 ÷ 100) = 75 units.
So, the new quantity supplied (Q₂) = Q₁ + ΔQ
Q₂ = 200 + 75 = 275 units.
The new quantity supplied at ₹10 per unit is 275 units.
12. At a price of ₹40 per unit, the quantity supplied of a commodity is 400 units. When its price falls by 10%, its quantity supplied falls by 36 units. Calculate its elasticity of supply. Is its supply elastic? Give reason for your answer.
Answer:
Elasticity of supply (e) is calculated using the formula:
e = (%Δ in supply) ÷ (%Δ in price)
Given:
Initial price (P₁) = ₹40,
Quantity supplied at ₹40 = 400 units,
Price falls by 10%,
Change in quantity supplied = 36 units.
Now,
New price (P₂) = ₹40 – 10% of ₹40 = ₹36.
%Δ in price = ((36 – 40) ÷ 40) × 100 = -10%.
%Δ in supply = (36 ÷ 400) × 100 = 9%.
Now, calculate the elasticity of supply:
e = (9%) ÷ (-10%) = 0.9
Since the elasticity of supply is less than 1, the supply is inelastic.
13. When the price of a good falls from ₹10 to ₹9 per unit, total revenue declines from ₹1200 to ₹918. Calculate its price elasticity of supply.
Answer:
Elasticity of supply (e) is calculated using the formula:
e = (%Δ in supply) ÷ (%Δ in price)
Given:
Initial price (P₁) = ₹10,
Final price (P₂) = ₹9,
Initial total revenue (TR₁) = ₹1200,
Final total revenue (TR₂) = ₹918.
First, calculate %Δ in price:
%Δ in price = ((9 – 10) ÷ 10) × 100 = -10%.
Now,
Quantity supplied at P₁ = TR₁ ÷ P₁ = 1200 ÷ 10 = 120 units,
Quantity supplied at P₂ = TR₂ ÷ P₂ = 918 ÷ 9 = 102 units.
%Δ in supply = ((102 – 120) ÷ 120) × 100 = -15%.
Now, calculate the elasticity of supply:
e = (-15%) ÷ (-10%) = 1.5.
14. A firm received revenue of ₹3600 when the price of a commodity was ₹20 per unit. Its revenue fell to ₹2700 when the price increased by 10%. Calculate the elasticity of supply.
Answer:
Elasticity of supply (e) is calculated using the formula:
e = (%Δ in supply) ÷ (%Δ in price)
Given:
Initial revenue (TR₁) = ₹3600,
Initial price (P₁) = ₹20,
New revenue (TR₂) = ₹2700,
Price increases by 10%, so new price (P₂) = ₹22.
First,
Quantity supplied at P₁ = TR₁ ÷ P₁ = 3600 ÷ 20 = 180 units,
Quantity supplied at P₂ = TR₂ ÷ P₂ = 2700 ÷ 22 = 122.73 units (approximately).
%Δ in price = 10%,
%Δ in supply = ((122.73 – 180) ÷ 180) × 100 = -31.82%.
Now, calculate the elasticity of supply:
e = (-31.82%) ÷ (10%) = 1.67.
15. When the price of a commodity is ₹10, the quantity supplied is 20 units. As price increases to ₹15, the quantity supplied increases to 30 units. Find out the elasticity of supply.
Answer: Elasticity of supply (e) is calculated using the formula:
e = (%Δ in supply) ÷ (%Δ in price)
Given:
Initial price (P₁) = ₹10,
Final price (P₂) = ₹15,
Initial quantity supplied (Q₁) = 20 units,
Final quantity supplied (Q₂) = 30 units.
%Δ in price = ((15 – 10) ÷ 10) × 100 = 50%,
%Δ in supply = ((30 – 20) ÷ 20) × 100 = 50%.
Now,
e = 50% ÷ 50% = 1.
The elasticity of supply is unitary elastic.
Extras
Additional MCQs
1. What is supply in economics defined as?
A. Desired quantity
B. Actual quantity
C. Fixed quantity
D. Unlimited quantity
Answer: A. Desired quantity
Q. What variable is supply always related to?
A. Time
B. Price
C. Demand
D. Quantity
Answer: B. Price
Q. How is supply different from stock?
A. Supply is the same as stock
B. Stock refers to actual quantity, while supply refers to desired quantity
C. Supply is always larger than stock
D. Stock refers to the price of goods
Answer: B. Stock refers to actual quantity, while supply refers to desired quantity
Q. What does market supply refer to?
A. Supply of one firm
B. Sum of supplies from all firms in the market
C. Demand in the market
D. Price offered by one firm
Answer: B. Sum of supplies from all firms in the market
Q. Which factor affects the quantity of goods supplied directly according to the law of supply?
A. Cost of production
B. Profit margins
C. Price of goods
D. Demand for goods
Answer: C. Price of goods
Q. Which of the following is an exception to the law of supply?
A. Technological improvements
B. Perishable goods
C. Government policy
D. Input prices
Answer: B. Perishable goods
Q. What is the effect on supply when input prices increase?
A. Supply increases
B. Supply remains unchanged
C. Supply decreases
D. Supply is unaffected by input prices
Answer: C. Supply decreases
Q. What happens when the number of firms in a market increases?
A. Supply decreases
B. Supply remains the same
C. Supply increases
D. Price increases
Answer: C. Supply increases
Q. What is the supply curve based on?
A. Demand changes
B. Market expectations
C. Price and quantity supplied
D. Government regulations
Answer: C. Price and quantity supplied
Q. What does a shift in the supply curve represent?
A. Change in demand
B. Change in price
C. Change in supply due to other factors than price
D. Change in the number of firms
Answer: C. Change in supply due to other factors than price
Q. What is reserve price?
A. Maximum price sellers are willing to charge
B. Minimum price sellers are willing to accept
C. Price set by the government
D. Price at which all goods are sold
Answer: B. Minimum price sellers are willing to accept
Q. What happens during the expansion of supply?
A. Supply decreases due to price decrease
B. Supply increases due to price increase
C. Supply remains the same despite price changes
D. Supply increases due to more firms entering the market
Answer: B. Supply increases due to price increase
Q. When does contraction of supply occur?
A. When prices rise
B. When prices fall
C. When demand increases
D. When government taxes are imposed
Answer: B. When prices fall
Q. What kind of supply is shown by a perfectly inelastic supply curve?
A. Supply increases with price
B. Supply does not change with price
C. Supply decreases with price
D. Supply is infinite
Answer: B. Supply does not change with price
Q. What does a leftward shift in the supply curve indicate?
A. Increase in supply
B. Decrease in supply
C. No change in supply
D. Increase in demand
Answer: B. Decrease in supply
Q. What determines price elasticity of supply?
A. Change in demand
B. Change in market regulations
C. Change in price
D. Change in profits
Answer: C. Change in price
Q. What happens when supply is perfectly elastic?
A. Supply remains the same regardless of price
B. Supply increases only if price increases
C. Supply changes without any price change
D. Supply decreases when price increases
Answer: C. Supply changes without any price change
Q. How is unitary elastic supply defined?
A. Percentage change in supply equals percentage change in price
B. Percentage change in supply is less than percentage change in price
C. Percentage change in supply is greater than percentage change in price
D. Supply does not change at all
Answer: A. Percentage change in supply equals percentage change in price
19. What happens in the case of inelastic supply?
A. Supply changes more than price
B. Supply changes less than price
C. Supply remains constant
D. Supply becomes perfectly elastic
Answer: B. Supply changes less than price
Additional questions and answers
1. What is the meaning of supply in economics?
Answer: Supply is the amount of a commodity that a seller (or a firm) is willing to sell in a market at a given price in a given period of time. Sellers may offer different quantities of a commodity for sale at different prices. Therefore, supply can also be defined as a schedule of quantities that will be offered for sale at various prices.
There are three important aspects of supply:
- Supply is a desired quantity, meaning how much producers are willing to sell, not how much they actually sell.
- Supply is always explained with reference to price. Like demand, the supply of a commodity is always at a price.
- Supply is a flow variable. It refers to the amount producers are willing to sell during a specific period of time, like per day, per week, or per year.
Economists distinguish between supply and quantity supplied. Supply refers to the set of quantities offered for sale at various prices, whereas quantity supplied refers to the specific quantity offered for sale at a certain price.
Q. How is supply different from stock?
Answer: Supply refers to the quantity of a commodity that producers are willing to offer at a certain price, whereas stock indicates the total quantity of a commodity available with producers for sale. Stock represents actual supply, while supply represents desired supply.
For example, if a farmer has produced 300 quintals of wheat but is prepared to sell only 100 quintals at the current market price of ₹800 per quintal, the stock is 300 quintals, while the supply is 100 quintals. If the farmer sells the entire stock at the current price, then supply would coincide with the stock.
Q. What is the difference between individual supply and market supply?
Answer: Individual supply refers to the quantity of a commodity that a single firm is willing to produce and offer for sale at a particular price during a specific period. On the other hand, market supply refers to the total quantity that all firms in the market are willing to produce and offer for sale at a particular price during a specific period. Market supply is the sum of the individual supplies of all firms.
For example, if firms A, B, and C produce sugar and are willing to sell 200, 300, and 250 quintals per month at ₹30 per kg, respectively, the market supply of sugar will be 750 quintals per month (200 + 300 + 250).
Q. What are the major determinants of the supply of a commodity?
Answer: The major determinants of the supply of a commodity are:
- Price of the commodity: Higher prices lead to larger supply, as producers can earn more profits.
- Prices of other goods: If prices of other goods increase, producers may shift production to those more profitable goods.
- Prices of related goods: The supply of a commodity depends on the prices of related goods, especially substitutes. Producers may switch between commodities based on price changes.
- Prices of inputs: Higher input prices reduce profitability, leading to lower supply.
- State of technology: Technological improvements allow firms to produce more with the same resources, increasing supply.
- Goals of the firm: Firms aiming for profit maximization will supply more. Firms with other goals, like sales maximization, may supply more than the profit-maximizing quantity.
- Number of firms: An increase in the number of firms increases the total supply of the commodity.
- Government policy: Taxes or subsidies can affect the price at which firms are willing to supply their products.
- Future expectations: If producers expect prices to rise in the future, they may reduce current supply to sell more at higher prices later.
Q. How does future price expectation influence supply?
Answer: If producers expect the price of a commodity to rise in the near future, they may reduce their current supply to be able to offer more goods in the future at a higher price. Conversely, if they expect prices to fall, they may increase the current supply to avoid future losses.
Q. How does the state of technology affect the supply of a commodity?
Answer: If there is an improvement in production technology, firms may be able to produce more with the same resources. This can reduce the average cost of production, allowing firms to supply more at the same price. Therefore, technological innovation plays a key role in increasing the supply of a product.
Q. What is the role of government policy in determining the supply of a commodity?
Answer: Government policies, such as taxes and subsidies, can significantly impact the supply of a commodity. If the government imposes a sales tax, the seller may need to raise the price to maintain profit margins, reducing supply at lower prices. On the other hand, if the government provides subsidies, the seller may reduce the price, increasing supply at a lower cost to consumers.
Q. What is the law of supply and what is meant by reserve price?
Answer: According to the law of supply, other things being equal, the quantity supplied of a commodity rises directly with its price. In other words, when the price of a commodity rises, the quantity supplied increases and vice versa, provided other factors remain constant. The relationship between price and quantity supplied is direct, while the relationship between price and quantity demanded is inverse.
Reserve Price: The price cannot fall below a certain level. If the price falls too much, the seller may refuse to sell. The price below which producers and sellers are not willing to sell their goods is called the reserve price or minimum supply price. The reserve price depends on factors such as:
- Durability: More durable goods can be stored and sold later, leading to a higher reserve price.
- Future Expectations: If the seller expects a price rise, the reserve price will be high, and if a price fall is expected, the reserve price will be low.
- Costs of Production: Expected changes in production costs affect the reserve price. If future costs are expected to fall, the reserve price will be lower.
- Cost of Storage: Longer storage periods lower the reserve price.
- Cash Requirements: Urgency for cash lowers the reserve price.
Q. What are the assumptions of the law of supply?
Answer: The phrase “other things being equal” in the law of supply refers to the assumptions that all determinants of supply other than price remain unchanged. The assumptions are:
- No change in the price of related goods.
- No change in the state of technology.
- No change in the goals of the firms.
- Prices of factors of production do not change.
- Producers do not expect any change in the price of the commodity in the near future.
Q. What is a supply schedule and what are its types?
Answer: A supply schedule is a tabular statement showing various quantities that producers are willing to produce and sell at various alternative prices during a given period. It shows the relationship between the price of a commodity and the quantity that would be supplied. There are two types of supply schedules:
- Individual Supply Schedule: Indicates the different quantities supplied by a producer at different prices.
- Market Supply Schedule: Shows the quantities supplied by all firms at each market price during a given period. It is the summation of all individual supply schedules.
Q. How is a supply curve represented and what types are there?
Answer: A supply curve is the graphical representation of the relationship between the price of a commodity and the quantity supplied, assuming all other factors influencing supply are constant. There are two types of supply curves:
- Individual Supply Curve: Shows various quantities of a given commodity that an individual producer is willing to supply at different prices.
- Market Supply Curve: Represents the quantities all producers in the market are willing to supply at different prices.
Q. What are the reasons behind the operation of the law of supply?
Answer: The law of supply operates due to two main reasons:
- Profit Motive: Producers aim to maximize profits, and higher prices incentivize them to increase the supply of goods.
- Law of Diminishing Returns: As more units of the variable factor are employed, marginal product decreases, causing production costs to rise. Therefore, higher prices are needed to cover the increasing costs of production.
Q. What are the exceptions to the law of supply?
Answer: The law of supply has the following exceptions:
- Future Expectations: Sellers may supply less at a higher price if they expect prices to rise further or supply more at a lower price if they expect prices to fall.
- Agricultural Goods: The supply of agricultural goods is more dependent on natural factors than price.
- Perishable Goods: The supply of perishable goods like milk or vegetables is not influenced by price, as they cannot be stored.
- Goods of Auction: The supply of auctioned goods is limited and cannot be changed.
- Disposal of Old Stocks: Sellers might reduce prices to clear old stock.
- Rare Goods: The supply of rare or artistic goods cannot be increased even if their prices rise.
Q. What is the difference between a change in quantity supplied and a change in supply?
Answer: A change in quantity supplied refers to movement along the same supply curve due to a price change. When quantity supplied increases because of a price rise, it is called an expansion of supply. When price falls and quantity supplied decreases, it is called contraction of supply.
A change in supply, however, refers to a shift in the supply curve due to changes in factors other than price, such as technology, input costs, or producer expectations.
Q. What does a shift in the supply curve mean, and how does it affect supply?
Answer: A shift in the supply curve means that at each price, a different quantity is supplied. This shift occurs due to factors other than the commodity’s own price, such as the goal of the firm, technology, number of firms in the market, tax rate, or interest rate. The change in supply can either be an increase or a decrease. If a larger quantity is supplied due to these factors, it is called an increase in supply. If the quantity supplied falls, it is called a decrease in supply.
Q. Explain the two aspects of increase in supply.
Answer:
- Same Price – More Supply: At the same price, more supply is offered. For example, if the price is ₹10 per unit, initially 100 units are supplied, but when supply increases, 120 units are supplied even at the same price. This increase may be due to factors like a fall in production cost, improved technology, or an increase in the number of producers. A rightward shift in the supply curve indicates this increase in supply.
- Less Price – Same Supply: In another scenario, the same quantity is supplied at a lower price. For instance, initially 100 units were supplied at ₹10 per unit, but after an increase in supply, the same quantity is supplied at ₹8 per unit. A downward shift in the supply curve indicates this increase in supply.
Q. Explain the two aspects of decrease in supply.
Answer:
- Same Price – Less Supply: Supply may fall due to factors like an increase in input prices, fewer producers, or higher excise duties. For example, initially, 100 units were supplied at ₹10 per unit, but after a decrease in supply, only 70 units are supplied at the same price.
- More Price – Same Supply: In this case, the same quantity is supplied at a higher price. For example, initially, 100 units were supplied at ₹10 per unit. When supply decreases, the price rises to ₹12 per unit, and the same quantity is supplied at this higher price.
Q. What is the distinction between movement along the supply curve and shift of the supply curve?
Answer:
- Movement along the supply curve implies a change in quantity supplied due to a change in the commodity’s price.
- A movement from left to right indicates an expansion in quantity supplied due to an increase in price.
- A movement from right to left indicates a contraction in quantity supplied due to a fall in price.
- All other factors except price remain unchanged.
- Shift of the supply curve implies a change in supply at each price.
- A rightward shift means an increase in supply at each price.
- A leftward shift means a decrease in supply at each price.
- Price is affected by supply, and factors other than price are flexible.
Q. What is price elasticity of supply, and how is it measured?
Answer: Price elasticity of supply measures the degree of responsiveness of the quantity supplied to changes in the product’s price. It can be calculated as:
es=Percentage change in quantity suppliedPercentage change in its price×100e_s = \frac{\text{Percentage change in quantity supplied}}{\text{Percentage change in its price}} \times 100es=Percentage change in its pricePercentage change in quantity supplied×100
Where:
- ΔQ\Delta QΔQ = Change in quantity supplied
- QQQ = Initial quantity of supply
- ΔP\Delta PΔP = Change in price of the product
- PPP = Initial price of the product
When the percentage change in supply is greater than the percentage change in price, supply is elastic (es > 1). When the percentage change in supply is smaller, it is inelastic (es < 1). Price elasticity of supply is always positive, as price and supply move in the same direction.
Q. What are the five types of price elasticity of supply?
Answer:
- Perfectly Inelastic Supply: Quantity supplied does not change despite changes in price. The supply curve is vertical, and elasticity is zero.
- Perfectly Elastic Supply: Supply changes to any extent without any change in price. The supply curve is horizontal, and elasticity is infinite.
- Unit Elastic Supply: The percentage change in supply equals the percentage change in price. Elasticity is one.
- Less Elastic (Inelastic) Supply: The percentage change in supply is smaller than the percentage change in price. Elasticity is less than one.
- Highly Elastic Supply: The percentage change in supply is greater than the percentage change in price. Elasticity is more than one.
Q. What does a perfectly inelastic supply curve look like, and what does it indicate?
Answer: A perfectly inelastic supply curve is vertical, parallel to the Y-axis. This indicates that the quantity supplied remains fixed at a certain level, regardless of changes in price. This type of supply is often seen in rare goods where supply cannot change in response to price changes. The numerical value of elasticity in this case is zero.
Q. What are the two popular methods of measuring price elasticity of supply?
Answer: The two popular methods of measuring price elasticity of supply are:
- Proportionate (or Percentage) Method: According to this method, elasticity of supply (e) is the ratio between percentage change in quantity supplied and percentage change in the price of the commodity. This method originated from the definition of price elasticity of supply itself.
- Geometric Method: This method does not measure the exact value of elasticity of supply. It only indicates whether supply is more elastic, less elastic, or unitary elastic.
Q. Explain the geometric method of measuring price elasticity of supply using the concept of straight-line supply curves.
Answer: In the geometric method, a straight-line upward-sloping supply curve is taken, and a perpendicular is drawn from any point on the curve (point S) to find the quantity supplied. The supply curve is extended leftwards, intersecting the X-axis at point M. The elasticity is found using the ratio of the horizontal segment (Mq) to the quantity supplied (Oqo). There are three possible cases:
- Panel (a): The supply curve cuts the price-axis in its positive range and the quantity axis in its negative region. Elasticity of supply is greater than one because the numerator (Mq) is greater than the denominator (Oqo).
- Panel (b): The supply curve passes through the origin, so Mq equals Oq. Elasticity is equal to one.
- Panel (c): The supply curve intersects the X-axis at a positive point. The numerator is smaller than the denominator, so elasticity is less than one.
Q. Describe the price elasticity of supply for three constant supply curves shown in Fig. 9.16.
Answer: The three constant elasticity supply curves have the following characteristics:
- Supply curve S₁: It has zero elasticity since the same quantity is supplied regardless of the price.
- Supply curve S₂: It has infinite elasticity at price P₁. Nothing is supplied below P₁, but an infinite quantity is supplied at price P₁.
- Supply curve S₃: It, along with all other straight-line supply curves passing through the origin, has unit elasticity, meaning the percentage change in quantity equals the percentage change in price.
Q. What are the determinants of price elasticity of supply?
Answer: The determinants of price elasticity of supply are:
- Possibility of Shifting from Production: The easier it is for producers to shift from the production of other products to the one whose price has risen, the more elastic the supply.
- Time-Period: Elasticity of supply increases with the length of time available for producers to adjust output.
- Availability of Resources and Facilities: Supply is more elastic when resources and facilities like irrigation, power, and transportation are readily available.
- Behaviour of Cost of Production: Supply is more elastic if costs of production do not increase significantly with output changes.
- Nature of Commodity Produced: Durable goods tend to have more elastic supply, while perishable goods have relatively inelastic supply.
Q. How does the time-period affect the elasticity of supply?
Answer: The elasticity of supply is affected by the time-period in the following ways:
- Very short period (Market period): The supply curve is vertical, indicating no change in quantity supplied regardless of price.
- Short period: Supply can change to some extent by adjusting variable factors like labour. The supply curve is relatively inelastic.
- Long period: Producers can adjust all factors of production, making the supply curve more elastic.
Q. How does the availability of resources and facilities affect price elasticity of supply?
Answer: If resources and facilities like irrigation, power, and transportation are easily and adequately available, producers can respond quickly to changes in price, making the supply more elastic. However, if these resources are scarce or inadequate, supply becomes inelastic because producers cannot adjust their output easily.
28. How does the nature of the commodity produced influence the elasticity of supply?
Answer: The nature of the commodity greatly affects its elasticity of supply:
- Durable goods: Their supply is relatively elastic because they can be stored. Producers can quickly adjust supply by altering their stock levels.
- Perishable goods: Their supply is relatively inelastic because they cannot be stored for long periods, and any change in supply has to come from changes in production.
