for engineering economics

1. Unit II
Supply Analysis

2. Supply
• Supply of a commodity is that amount which a
seller is able and willing to offer for sale at a
particular price during a certain period of
time.
• Supply is related to price and time.
• Supply comes out of stock.
• Stock is outcome of production.

3. Determinants
• Cost of Factors of Production
• Price
• Technology of production
• Government Policies
• Factors outside economic sphere

4. Supply Function
Qs = f (P;PRG)
Where,
P=Price of the commodity
PRG= Price of Related Good
It is a mathematical relationship between
supply of a commodity and its
determinants.

5. Law of Supply
• Other things remaining unchanged, the supply
of a commodity expands with rise in price and
contracts with fall in price.

6. Why supply curve slops upwards from
left to right positively?
• Higher the price greater the incentive for
producer to produce and supply more in
market, other things remain same.
• Positive slop of supply curve is also caused by
rise in cost of production.
• This rise in price also motivates other
producers to produce same commodity so as
to earn higher profits.

7. Supply Schedule
• Tabular relationship between supply of a
commodity at different prices over a given
period of time.
Price of commodity Quantity Supply

8. Assumption underlying law of supply
• Cost of production is unchanged.
• Technique of production is unchanged.
• Fixed Scale of production
• Govt. Policies are unchanged.
• Transportation Cost is unchanged.
• Prices of other goods held constant.

9. Different types of Supply Curves
• Extention
Increase in Supply due to
increase in Price.
• Contraction
Decrease in Supply due to
decrease in Price.

10. Supply Shifts
• Increase and Decrease in Supply due to
changes in various other determinants while
price is constant. It causes shifts in supply
curves.
• Types:- i. Rightwards ii. Leftwards

11. Why there is Shift?
• Producer willing to supply higher quantity at
same price or same quantity at lower price.
• Improvement in technology
• Decrease in Input prices

12. Exceptions to Law of Supply
• There are certain commodities, supply of
which can not be increased at all.
Eg:-Rare good like classic paintings, old
manuscripts, old coins.
• Goods whose supply can’t be increased in
short run like agricultural goods.

13. Cont……………………………………………..
• In some cases, lower quantity would be
offered at a higher price than at a lower price.
Here supply curve will be backward slopping.
Eg:- Labour supply affects due to decreasing
efficiency or poor performance to enjoy
leisure.
Wages
Time worked
Individual Labour Supply Curve

14. Elasticity Of Supply
• PES (Price Elasticity of Supply) is the
responsiveness of quantity supplied in the
price as % change in Qs introduced by 1%
change in Price.
PES = change in quantity supplied * P
change in price * Q

15. Types of PES
• Elastic:-
Eg: Textile production-simple, unskilled labous,
production facilities are easy to avail.
• Inelastic:-
Eg: Specific type of motor vehicle with multi
stage process , specialized equipments
needed.

16. The End