Micro Economics: Supply analysis. Factors affecting Supply, Elasticity of Supply

1. ANALYSIS OF SUPPLYANALYSIS OF SUPPLY
Prof. Prabha Panth,
Osmania University

2. Supply and Stock
• Stock is the amount of goods currently
available for sale.
• Stock: regarded as inventories.
• Supply: is the amount of goods that sellers
offer to sell at various prices, ceteris paribus.
• Rational seller: maximises profits
• Supply is a flow of goods at various prices,
• Can be shown as a schedule or in a diagram.
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3. The Supply Curve
• The Law of Supply: Other things remaining
constant, quantity supplied of a commodity is
positively related to its price.
Sq = f(P)
• Higher the price, higher the quantity supplied.
• The Supply curve slopes upwards to the right.
• Higher price means higher profit margin, given
costs.
• So sellers increase their supply, when price is
higher.
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4. Supply Curve
Price (Rs) Q supplied
(kgs)
0.5 1
1.0 2
1.5 3
2.0 4
2.5 5
3.0 6
3.5 7
S
Rs
Qs
0 1 2 3 4
2.0
1.5
1.0
0.5
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5. Factors affecting Supply
1. Price of the commodity – more is supplied at
higher prices, less at lower prices.
2. Prices of related goods –
Substitutes - If price of tea falls, then demand for
tea increases, but demand for coffee falls. So
supply of coffee falls.
Complements in production -- good that is
produced with other good – e.g. price of cars
decrease, demand and so supply of tires
increases.
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6. Factors affecting Supply
3. Seller’s expectations, Expect input prices to fall in
future: increase supply today
Expect price of good to rise in future: decrease
supply today
4. Number of sellers is more, market supply
increases
5. Technology – new technology, new products, so S of
old products falls.
6. Time Period – more time, higher supply
7. Prices of inputs – or cost of production increases e.g.
wages, affects supply decreases.
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7. Changes is Quantity Supplied vs.
Change in Supply
1. Changes in Quantity supplied: also called
movements along a given supply curve.
Affected by changes in the price of the
commodity only, ceteris paribus.
2. Change in Supply: or shift in the Supply
curve.
Changes in other factors affecting supply,
causes entire supply curve to shift
upwards or downwards.
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8. P
Qs0
S
Changes in Q supplied
p0
q0
a
p1
q1
b
Change in Q
supplied:
On a given Supply
curve, any
increase or
decrease in price,
will cause
quantity supplied
to increase or to
decrease.
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9. Shifts in Supply curve – Increase and
Decrease in Supply
P
0 q
S1
P1
q1
a
S2
b
q2
S0
c
q0
If ceteris
paribus
conditions do
not exist, then
the total supply
curve may shift.
E.g. change in
technology, or
taxes, etc.
It can shift to
the right
(increase in
supply) or to
the left
(decrease in
supply).
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10. Market Supply
• The sum total of all supply schedules of
different sellers at each price, gives the
Market Supply.
• Market Supply is the horizontal summation of
individual sellers, at different prices.
S = Σs
Market price is determined by Market Supply
and Market Demand curves.
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11. Market Supply
Px q1 q2 q3 Market S
= Σqs
1 5 8 12 25
2 7 10 15 32
3 9 12 18 39
4 11 14 21 46
5 13 16 24 53
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12. Market Supply - Diagram
P=3
1 2
3
Σqs = Mkt
supply
curve
0
P
Qs
9
12 18 39
S
Q1
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13. Elasticity of Supply
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14. Elasticity of Supply
• Elasticity of Supply is the responsiveness of
quantity supplied to a change in the price,
ceteris paribus.
• It is given by the formula:
+ es= ∆Qs. P
∆P Qs
Usually the elasticity of supply is a positive
number, showing a positive response of
quantity supplied to a change in the price.
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15. Types of S-elasticities
1. Elastic supply: Rate of increase in Qs > rate of
increase in P. (es > 1)
0
Qs
Rs
S
S
Q0
P0
a
P1
b
Q1
Supply
responds at a
rate greater
than rate of
change in P.
Goods whose
supply can
easily increase,
or are available
in stock.
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16. 2. Inelastic supply:
Qs responds at a
rate lower than
change in price.
(es < 1)
Goods needing more
time for
production, or
low stocks have
inelastic supply.
0 Qs
Rs
S
S
a
Q0
b
Q1
P0
P1
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17. 3. Unitary elasticity: es = 1, and quantity supplied
responds at the same rate as change in price.
∆Q/Q = ∆P/P
0
Rs
Qs
P0
a
Q0
P1
b
Q1
S
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18. 4. Perfectly inelastic:
There is no
response of Qs to
∆P. (es = 0)
Rs
0
Qs
S
S
P0
a
P1 b
5. Perfectly elastic:
or infinite
elasticity. Supply
responds infinitely
to ∆P. (es = ∝)
Rs
0
Qs
S
P0
P1
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19. Questions
I. Short answers:
a) What is the difference between Stock and
Supply?
b) State and explain the Law of Supply.
c) What are the factors that affect supply?
d) How is elasticity of supply measured? Give the
formula and a diagram to illustrate your answer.
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20. Questions
II. Essay Questions:
1. What is the difference between ‘changes in Qs’
and ‘increase and decrease in S’? Explain with the
help of diagrams.
2. What is Market supply? How is it derived?
3. What is elasticity of supply? Illustrate the different
types of price elasticities with the help of diagrams.
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