3. Introduction
relationship between the supply and price of a product
while other factors are kept constant
Higher the price higher the supply and lower the price lower the
supply
4. Determinants
of Supply
Determinants of supply definition refer to factors that can change or affect how readily
a manufacturer is able to deliver a certain good or service.
Determinants of supply may include a price or non-price variables.These factors impact
the supply of commodities in a positive or negative manner.
Business managers analyze the determinants of supply to study and anticipate the
future supply of a product and strategize accordingly.
Major determinants of supply include the price of the product or service, price of a
related item, price of factors of production, technology intervention, administrative
policy, and price speculations.
5. Determinants
Price of the
Good or Service
(Own Price)
Production
Costs
Technology
and Innovation
Number of
Suppliers
Expectations of
Future Prices
Government
Policies and
Regulations
Natural Events Input Prices
Taxes and
Subsidies
Market
Conditions and
Competition
6. Assumptions of law of supply
Though the price of a product changes, but there will be no change in the cost of production.
There is no change in the technique of production.This is because the advanced technique would reduce
the cost of production and make the seller supply more at a lower price.
There is no change in the scale of production.
The policies of the government will remain constant.
The transportation cost remains the same.
There is no speculation about prices in future, which otherwise can affect the supply of a product.
7. Key assumptions
of the law of
supply
CETERIS PARIBUS: THE LAW
OF SUPPLY ASSUMES THAT
ALL OTHER FACTORS
AFFECTING SUPPLY
REMAIN CONSTANT,
EXCEPT FOR THE PRICE OF
THE GOOD OR SERVICE IN
QUESTION.
RATIONALITY OF
PRODUCERS: PRODUCERS
ARE ASSUMED TO BE
RATIONAL ECONOMIC
AGENTS WHO AIM TO
MAXIMIZE THEIR PROFITS.
PRODUCTION
TECHNOLOGY: THE LAW OF
SUPPLY ASSUMES THAT
THE TECHNOLOGY AND
PRODUCTION METHODS
USED BY PRODUCERS
REMAIN UNCHANGED.
AVAILABILITY OF
RESOURCES: IT IS
ASSUMED THAT THE
NECESSARY INPUTS AND
RESOURCES FOR
PRODUCTION ARE READILY
AVAILABLE AND DO NOT
EXPERIENCE SIGNIFICANT
CHANGES.
TIME FRAME: THE LAW OF
SUPPLY DOES NOT SPECIFY
A SPECIFIC TIME FRAME
BUT GENERALLY ASSUMES
THAT PRODUCERS CAN
ADJUST THEIR OUTPUT IN
RESPONSE TO CHANGES IN
PRICE OVER A
REASONABLE PERIOD.
PROFIT MOTIVE:
PRODUCERS ARE ASSUMED
TO BE MOTIVATED BY THE
DESIRE TO EARN A PROFIT.
COMPETITIVE MARKET: THE
LAW OF SUPPLY OFTEN
ASSUMES A COMPETITIVE
MARKET STRUCTURE WITH
MANY INDEPENDENT
PRODUCERS.
PERFECT INFORMATION: IN
SOME ECONOMIC MODELS,
IT IS ASSUMED THAT
PRODUCERS HAVE
PERFECT INFORMATION
ABOUT MARKET
CONDITIONS.
8. Price elasticity
of supply
concept in economics that measures the
responsiveness of the quantity supplied
of a good or service to changes in its
price.
it quantifies how sensitive producers are
to changes in the market price when
deciding how much of a product to
supply
10. Key characteristics and types of price elasticity of supply
In this theoretical
scenario, the quantity
supplied remains
constant regardless of
changes in price.Again,
this is an extreme case
and is not typically seen
in real markets.
Perfectly Inelastic
Supply (PES = 0):
In this theoretical
scenario, producers can
supply any quantity of a
good or service at a
specific price, and they
can do so
instantaneously.
Perfectly elastic supply
is not observed in the
real world.
Perfectly Elastic
Supply (PES = ∞):
When the price
elasticity of supply is
exactly 1 (in absolute
value), it means that the
percentage change in
quantity supplied is
exactly equal to the
percentage change in
price. In this case,
producers can adjust
their output in a way
that maintains a
constant supply-to-
price ratio.
Unitary Elastic
Supply (PES = 1):
When the price
elasticity of supply is
less than 1 (in absolute
value), it suggests that
the quantity supplied is
not very responsive to
price changes.
Producers find it
difficult to adjust their
output in response to
price changes. Inelastic
supply means that even
significant price
changes may result in
only modest changes in
the quantity supplied.
Inelastic Supply
(PES < 1):
When the price
elasticity of supply is
greater than 1 (in
absolute value), it
indicates that the
quantity supplied is
highly responsive to
changes in price.
Producers can easily
adjust their output in
response to price
changes. If the price
increases, they can
increase production
significantly, and if the
price decreases, they
can reduce production
substantially.
Elastic Supply
(PES > 1):
11. Solve
Consider the market for bedsheets. Initially, there were 20
bedsheets available at a price of Rs. 200 each. Following a
change in market conditions, the quantity supplied increased
to 30 bedsheets, and the price increased to Rs.300 per
bedsheet.
Let's consider the market for handcrafted artisanal pottery.
The initial quantity supplied is 100 pieces of pottery, and the
initial price is Rs. 50 per piece. After a change in market
conditions, the quantity supplied decreases to 90 pieces, and
the price increases to Rs.60 per piece.
Consider the market for umbrellas. The initial quantity
supplied is 1,000 umbrellas, and the initial price is Rs.10 per
umbrella. After a change in market conditions, the quantity
supplied increased to 2,500 umbrellas, and the price
increased to Rs.15 per umbrella.
12. Marginal
Revenue (MR)
•Marginal Revenue
(MR) Definition:
• MR in the law of supply represents the extra revenue a firm
generates by selling one additional unit of a product or
service in a competitive market.
•MR Equals Price:
• In a competitive market, it's crucial to understand that MR is
equivalent to the price at which each additional unit is sold.
•Law of Supply:
• The law of supply dictates that, all else being equal, an
increase in the price of a good or service leads to an increase
in the quantity supplied by producers. Conversely, a
decrease in price results in a decrease in the quantity
supplied.
•Calculating MR:To
calculate MR,
consider a firm
operating in a
competitive market:
• When the firm sells an extra unit of the product, it adds to its
total revenue by the price at which that unit is sold.
• Therefore, MR is essentially the same as the price of the
product.
•Constant MR:
• In such competitive markets, MR remains constant,
irrespective of the quantity supplied by the firm. It doesn't
influence the market price through its production or sales
decisio
14. Problem
Suppose a firm is selling widgets in a competitive market. It currently
sells 100 widgets at a price of Rs.10 each. If the firm decides to increase
its production and sells 101 widgets at a price of Rs. 9 each, what is the
MR for the 101st widget?
To find the MR for the 101st widget, we can use the formula:
In this case, the firm originally sold 100 widgets at Rs.10 each, so the initialTotal
Revenue (TR1) is:
TR1 = 100 widgets * Rs.10/widget = Rs.1,000
Next, the firm sells 101 widgets at Rs.9 each, so the newTotal Revenue (TR2) is:
TR2 = 101 widgets * Rs.9/widget = Rs.909
Now, we can calculate the change inTotal Revenue:
DeltaTR =TR2 -TR1 = Rs.909 - Rs.1,000 = -Rs.91
The change in Quantity Sold is 101 widgets - 100 widgets = 1 widget.
Now, plug these values into the MR formula:
MR = frac{-Rs.91}{1} = -Rs.91
So, the MR for the 101st widget is -Rs.91.
15. Problem
A bakery is selling 200 cupcakes at a price of Rs. 2 each. They
decide to increase the price to Rs. 3 per cupcake, and as a
result, they sell 210 cupcakes. Calculate the MR for the 210th
cupcake.
To find the MR for the 210th cupcake, we can follow the same process
as in the previous problem.
First, calculate the initialTotal Revenue (TR1):
400TR1=200cupcakes∗Rs.2/cupcake=Rs.400
Next, calculate the newTotal Revenue (TR2):
.630TR2=210cupcakes∗Rs.3/cupcake=Rs.630
Now, calculate the change inTotal Revenue:
230ΔTR=TR2−TR1=Rs.630−Rs.400=Rs.230
The change in Quantity Sold is 210 cupcakes - 200 cupcakes = 10
cupcakes.
Finally, plug these values into the MR formula:
23010=23MR=10Rs.230=Rs.23
So, the MR for the 210th cupcake is Rs. 23.
16. Total Revenue
Definition: Total Revenue is the total income earned by a firm from the sale of its products or
services during a specific period. It's calculated by multiplying the quantity sold by the price per
unit.
Relationship with Quantity and Price: Total Revenue is directly influenced by both the
quantity sold and the price at which the goods or services are sold. If the quantity sold
increases, TR generally increases as well, assuming the price remains constant. Similarly, if the
price per unit increases, TR increases, assuming the quantity sold remains constant.
Graphical Representation: Total Revenue is often represented graphically on a Total Revenue
curve. In the case of many businesses, initially, as more units are sold, Total Revenue increases
at an increasing rate (positive slope). However, at a certain point, further increases in quantity
may lead to diminishing returns, causing the Total Revenue curve to exhibit a decreasing rate of
increase (negative slope).
Use in Decision-Making: Understanding Total Revenue is essential for businesses when
making pricing and production decisions. It helps firms determine the optimal price and quantity
of goods to maximize their profitability. By analyzing how changes in price and quantity affect
Total Revenue, firms can make informed choices to achieve their financial goals.
18. Problem
A bakery sells 100 loaves of bread every day at a price of Rs.
50 per loaf. Calculate the bakery's Total Revenue (TR) for a
single day.
A toy store sells 50 toy cars at a price of Rs. 25 each and 30
toy trains at a price of Rs. 40 each. Calculate the toy store's
Total Revenue from toy cars and toy trains.
