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Supply Analysis


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Supply Analysis

  2. 2. What is Supply? <ul><li>Supply of a commodity is the amount of that commodity which the sellers (or producers) are able and willing to offer for sale at a particular price during a certain period of time. </li></ul><ul><li>Supply is always referred to in relation to price and time. </li></ul><ul><li>Supply is what the seller is able and willing to offer. </li></ul>
  3. 3. Law of Supply <ul><li>Under the ceteris paribus assumption, the law of supply may be stated as follows: </li></ul><ul><li>“ Other things remaining unchanged, the supply of a commodity expands (rises) with a rise in its price, and contracts (falls) with a fall in its price.” </li></ul>
  4. 4. Assumptions under the Law of Supply <ul><li>It is based on ceteris paribus assumptions : </li></ul><ul><li>1. Cost of production is unchanged. </li></ul><ul><li>2. Technique of production is unchanged. </li></ul><ul><li>3. Fixed scale of production. </li></ul><ul><li>4. Government policies are unchanged. </li></ul><ul><li>5. No change in Transport costs. </li></ul><ul><li>6. No speculation. </li></ul><ul><li>7. The prices of other goods are held constant. </li></ul>
  5. 5. <ul><li>Extension (Expansion) and Contraction of Supply: </li></ul><ul><li>With a rise in price, if the supply rises, it is extension of supply. </li></ul><ul><li>With a fall in price if the supply declines, it is contraction of supply. </li></ul><ul><li>Increase and Decrease in supply: </li></ul><ul><li>If more supply is forthcoming ‘ without a change in price’, it is called increase in supply. </li></ul><ul><li>If less supply is forthcoming ‘without a change in price’ , it is called decrease in supply. </li></ul>
  6. 6. Factors influencing change in supply <ul><li>1. Cost of Production. </li></ul><ul><li>2. Technique of production. </li></ul><ul><li>3. Natural Factors. </li></ul><ul><li>4. Government Policies. </li></ul><ul><li>5. Transport Facilities. </li></ul><ul><li>6. Business combines. </li></ul><ul><li>7. Goals of firms </li></ul><ul><li>8. Price of that commodity </li></ul><ul><li>9. Prices of related commodities </li></ul><ul><li>10. Expectations of future level of prices. </li></ul>
  7. 7. Elasticity of Supply <ul><li>Elasticity of supply is defined as “the degree of responsiveness of supply to a given change in price”. </li></ul><ul><li>Elasticity of supply is the ratio of percentage change or proportionate change in quantity supplied to the percentage or proportionate change in price. </li></ul><ul><li>i.e. Proportionate change in quantity supplied </li></ul><ul><li> Proportionate change in price </li></ul><ul><li>  Q </li></ul><ul><li>Q  Q x P </li></ul><ul><li>e s = ---------- = Q  P </li></ul><ul><li>  P </li></ul><ul><li>P </li></ul>
  8. 8. Factors determining Elasticity of Supply <ul><li>Time Period – short period relatively inelastic </li></ul><ul><li>Nature of commodities – perishable & durable. – </li></ul><ul><li>Time period -- long period – relatively elastic </li></ul><ul><li>Scale of Production – small scale - inelastic large scale – elastic. </li></ul><ul><li>Technique of Production – advanced technology– elastic. Labour intensive – less elastic. </li></ul><ul><li>Size of the Firm & No. of products produced. </li></ul><ul><li>Large firm – supply more elastic. </li></ul><ul><li>Natural Factors – climatic conditions affect supply of agricultural products </li></ul><ul><li>Nature of Production.- by their very nature – inelastic e.g., painting & artworks </li></ul><ul><li>Mobility of factors of production – high mobility – elastic </li></ul><ul><ul><ul><ul><ul><li> immobility – inelastic. </li></ul></ul></ul></ul></ul>