The document discusses the economic concepts of supply, including the law of supply which states that, all else being equal, an increase in price results in an increase in quantity supplied. It also elaborates on various factors affecting supply such as production costs, technology, and government regulations, along with exceptions to the law of supply, as well as the theory of production and types of elasticity of supply. Additionally, it covers the production function and the law of variable proportions, noting how output changes in response to variations in input.

1. ENGINEERING ECONOMICS
AND COSTING
Module-I
By- Dr. Ronismita Mishra

2. Meaning and Factors affecting Supply
In economics, the supply refers to the quantity of a good or service that
producers are willing and able to offer for sale at different prices during a
specific period. The law of supply states that, all else being equal, as the price
of a good or service increases, the quantity supplied also increases, and vice
versa. Here are some key concepts related to the meaning and factors
affecting supply:
Meaning of Supply:
1. Quantity Supplied:
• The amount of a good or service that producers are willing to offer for sale
in the market.
2. Price:
• Supply is typically depicted on a supply curve, which shows the relationship
between the price of a good and the quantity supplied.
3. Time Frame:
• Supply can vary in the short run and the long run. In the short run, factors
like production capacity and existing technology play a role. In the long run,
factors like technological advancements and changes in input costs can
affect supply.

3. Factors Affecting Supply:
1. Price of the Good or Service:
• As mentioned earlier, there is a direct relationship between the price of a
good and the quantity supplied. An increase in price often leads to an
increase in the quantity supplied, and a decrease in price leads to a
decrease in quantity supplied.
2. Production Costs:
• The costs of producing goods and services, including raw materials, labour,
and other inputs, can influence supply. If production costs rise, producers
may supply less at a given price.
3. Technology:
• Advancements in technology can enhance production efficiency, reduce
costs, and increase the quantity of goods supplied.
4. Number of Sellers:
• The total supply in the market is influenced by the number of sellers. More
sellers can lead to a higher overall supply.

4. 5. Expectations of Future Prices:
• If producers expect prices to rise in the future, they may reduce current
supply to sell at higher prices later. Conversely, if they expect prices to
fall, they may increase current supply.
6. Government Regulations:
• Regulations, such as taxes, subsidies, and production quotas, can impact the
cost of production and, consequently, the quantity supplied.
7. Natural Disasters and Weather Conditions:
• Events like natural disasters or adverse weather conditions can affect the
supply of certain goods, especially in agriculture.
8. Availability of Inputs:
• The availability of factors of production, such as labor, raw materials, and
technology, can affect the ability of producers to supply goods and
services.
Understanding these factors helps economists and businesses analyse and
predict changes in supply, which is crucial for making informed decisions in the
marketplace.

5. LAW OF SUPPLY
• The law of supply describes the relationship
between price and amount supplied when all other
variables remain constant (ceteris paribus).
• Price is a dominant factor in the determination
of the supply of a commodity. As the price of a
commodity increases, the supply of that
commodity in the market also increases and vice-
versa. This behaviour of the producers is studied
through the law of supply.

6. Assumptions of Law of Supply
The phrase “keeping other factors constant or
ceteris paribus” is used when describing the law of
supply. This expression refers to the following
presumptions that the law is based on:
• The price of other commodities is constant.
• The state of technology has not changed.
• The price of factors of production is constant.
• The taxation laws remain the same.
• The producer’s objectives are constant.

7. • The Law of Supply can be better understood with the
help of the following table and graph.
The above table indicates that when the price of the commodity rises, an
increasing number of units are offered for sale.
In the above graph, the rising slope of the supply curve (SS) indicates a
clear relationship between price and quantity supplied.

8. Important points about Law of Supply:
• The law of supply states the positive relationship
between price and quantity supplied of a commodity
after assuming that the other factors remain constant.
• As the law of supply indicates the direction of the
changes in quantity supplied of a commodity and not the
magnitude of the change. it is considered as a
quantitative statement.
• The law of supply does not establish any proportional
relationship between the change in price and the
respective change in quantity supplied of the commodity.
• The law of supply is one sided. It is because the law
explains only the effect of change in price on the supply
of the commodity and not the effect of change in supply
on the price of the commodity.

9. Reason for Law of Supply
The main reasons behind the law of supply are as follows:
1. Profit Motive:
• Maximising profits is the primary goal of producers when they supply a good or
service. Their profits grow when the price of a commodity rises without a change in
costs. Therefore, by increasing production, manufacturers increase the commodity’s
supply. On the other hand, as price fall, supply also declines since low price result in
lower profit margins.
2. Change in Number of Firms:
• When the price of a specific commodity increases, potential producers are
encouraged to enter the market and produce the good to make money. The market
supply rises as the number of businesses increases. However, once the price begins to
decline, some businesses that do not anticipate making any money at a low price may
stop production or cut it back. As the number of businesses in the market declines, it
decreases the supply of the given commodity.
3. Change in Stock:
• When the price of an item rises, sellers are eager to supply additional things from
their stocks. However, the producers do not release significant amounts from their
stock at a significantly cheaper price. They work on building up their inventory in
anticipation of potential price increases in the future.

10. Exceptions to the Law of Supply
Generally, the slope of the supply curve is upwards, showing that with the rise in the price of a
commodity, its quantity supplied also rises. However, there may be some cases when there is no
positive relationship between the supply and price of a commodity. These cases are as follows:
1. Future Expectations:
The law of supply is not valid if sellers expect a fall in the price in the future. The sellers will be
willing to sell more in this situation, even at a cheaper price. However, if sellers expect an increase in
the future price, they will reduce supply to deliver the item later at a higher price.
2. Agricultural Goods:
Agricultural products are exempted from the rule of supply as they are produced in response to
climatic circumstances. If the production of agricultural goods is low because of unexpected weather
changes, supply cannot be expanded, even at higher prices.
3. Perishable Goods:
Sellers are willing to offer more perishable commodities, such as fruits, vegetables, and other foods,
even if prices are dropping. This occurs because sellers cannot keep such things for an extended
period.
4. Rare Articles:
The law of supply does not apply to precious, rare, or artistic items. For example, even if the price
increases, the number of rare items like the Mona Lisa artwork cannot be increased.
5. Backward Countries:
Due to the scarcity of resources, output and supply cannot be enhanced in economically
underdeveloped countries.

11. Price Elasticity of Supply
• Law of Supply states that, other factors being
constant, quantity supplied increases with a price
increase and decreases with a decrease in the price of
the commodity.
• The degree of change in quantity supplied in response
to changes in price is known as Price Elasticity of
Supply.
• Price Elasticity of supply undertakes how the supply
of a particular product responds to price fluctuations.
• There are five types of elasticity of supply; Perfectly
Elastic Supply, Perfectly Inelastic Supply, Unit Elastic
Supply, More than Unit Elastic Supply, Less than Unit
Elastic Supply, and.

12. • The price elasticity of supply formula can
be represented as:
Price elasticity of supply = % change in
quantity supplied/% change in price
• It is calculated by dividing the
percentage change in quantity supplied
(∆Qs/Qs) by the percentage change in
price (∆P/P), which is mathematically
represented as,
Price Elasticity of Supply = (∆QS/QS) ÷
(∆P/P)
= (∆QS/∆P) * (P/QS)

13. Types of Elasticity of Supply
1. Perfectly Elastic Supply:
• Price Elasticity of Supply is said to be perfect elastic supply when at a
particular price, there is infinite supply for a commodity, and with even
a small change in its price, the supply becomes zero. Perfectly Elastic
Supply indicates that the suppliers are willing to sell only when the
prices of commodities are high. The price elasticity in this case is
infinite; i.e., ES = ∞, and the supply curve is a horizontal straight line
parallel to the X-axis.
Quantity supplied can be OQ,
OQ1, or OQ2 at the same
price as OP.
Price
(in ₹)
Supply
(in units)
20 150
20 250
20 35
The quantity supplied can be 150, 250,
or 350 units at the same price of 20.
₹
However, it must be kept in mind that
perfectly inelastic supply is an imaginary
situation.

14. 2. Perfectly Inelastic Supply:
• Price Elasticity of Supply is said to be perfect inelastic supply when the quantity
supplied does not change with the change in price. It shows that the supply would
remain the same irrespective of the price. The price elasticity in this case is
zero; i.e., ES = 0, and the supply curve is a vertical straight line parallel to the Y-
axis.
Quantity supplied remains the
same at OQ, with the change in
price from OP to OP1 to OP2.
Price (in
₹)
Supply
(in
units)
10 30
20 30
30 30
The quantity supplied remains the same
at 30 units, whether the price is 10,
₹
20, or 30.
₹ ₹

15. 3. Unitary Elastic Supply:
• Price Elasticity of Supply is said to be unit elastic supply when a price change is
precisely equal to the change in quantity supplied. The price elasticity of supply
is 1 in such cases; i.e., ES = 1, and the supply curve is a straight line passing
through the origin.
The quantity supplied rises from OQ to OQ1
with a rise in price from OP to OP1. As QQ1
is proportionately equal to PP1, the
elasticity of supply is equal to 1.
Price
(in ₹)
Supply
(in units)
20 200
30 300
The quantity supplied rises by 50% due
to a 50% increase in price.

16. 4. More than Unit Elastic Supply/Highly Elastic Supply:
• Price Elasticity of Supply is said to be more than unit elastic when the
percentage change in supply is relatively greater than the percentage
change in price. The price elasticity of supply in such cases is greater
than 1, i.e., ES > 1, and the supply curve intercepts on the Y-axis.
The quantity supplied rises from OQ to
OQ1 with a rise in price from OP to OP1.
As QQ1 is proportionately more than
PP1, the elasticity of supply is more than
1.
Price
(in ₹)
Supply
(in units)
20 200
30 400
The quantity supplied increases by 100%
due to a 50% increase in price.

17. 5. Less than Unit Elastic Supply/Less Elastic Supply:
• Price Elasticity of Supply is said to be less than unit elastic supply when
the percentage change in supply is relatively lower than the percentage
change in price. Price Elasticity of Supply is less than 1 in such cases;
i.e., ES < 1, and the supply curve intercepts on the X-axis
The quantity supplied rises from OQ to
OQ1 with a rise in prices from OP to
OP1. As QQ1 is proportionately less than
PP1, the elasticity of supply is less than
1.
Price
(in ₹)
Supply
(in units)
20 200
30 240
The quantity supplied rises by 20% due
to a 50% increase in price.

18. Theory of production
• In simple words, the definition of production is the
process in which various inputs, such as land, labour, and
capital, are used to produce the outputs in the form of
products or services. Each company is diverse and has a
particular production strategy, but all businesses strive
to combine their inputs in a way that maximizes their
profits.
• Businesses must take into account several factors when
deciding how much to produce to be profitable.
Businesses must consider the cost of the inputs utilized
in the production process.

19. In economics, the factors of production are the resources used in the production of
goods and services. These factors are essential inputs that contribute to the creation
of economic value. The traditional factors of production are often categorized into
four main types: land, labour, capital, and entrepreneurship.
1. Land:
• Land refers to all natural resources that are used in the production process. This
includes not only the physical land itself but also any natural resources that come
from the land, such as minerals, water, and forests.
2. Labour:
• Labour encompasses the physical and mental effort contributed by individuals to
the production of goods and services. It includes both skilled and unskilled workers.
3. Capital:
• Capital refers to the man-made goods used in the production process. It includes
machinery, tools, buildings, and any other durable products that are used to produce
other goods and services.
4. Entrepreneurship:
• Entrepreneurship involves the ability to combine the other factors of production
(land, labor, and capital) to create and organize a business venture. Entrepreneurs
take risks and make decisions to drive the production process.

20. Production Function
• The production function describes the link between physical inputs and physical output
(final output). The production function is often expressed in the following way:
Q = f(X1, X2)
where X1 and X2 are inputs or production parameters, and Q is the ultimate output.
1. Total Product
• In simple terms, we can define Total Product as the total volume or amount of final
output produced by a firm using given inputs in a given period of time.
2. Marginal Product
• The additional output produced as a result of employing an additional unit of the variable
factor input is called the Marginal Product. Thus, we can say that marginal product is the
addition to Total Product when an extra factor input is used.
Marginal Product = Change in Output/ Change in Input
Thus, it can also be said that Total Product is the summation of Marginal products at
different input levels.
Total Product = Marginal Product
Ʃ
3. Average Product
• It is defined as the output per unit of factor inputs or the average of the total product
per unit of input and can be calculated by dividing the Total Product by the inputs
(variable factors).
Average Product = Total Product/ Units of Variable Factor Input

22. Production Function can be
Short Run Production Function:
• The short run refers to a period during which at least one input in the production process is fixed,
typically the capital or plant size. In other words, some factors of production cannot be easily or
quickly changed.
• During the short run, a firm can adjust its output by varying the variable inputs (like labor and raw
materials), but it cannot alter its fixed inputs (like machinery or factory size).
• The law of diminishing returns is often more noticeable in the short run. As a firm increases the
quantity of a variable input while keeping some inputs fixed, there comes a point where the
marginal product of the variable input diminishes, leading to lower efficiency.
• The short-run production function is typically represented on a graph, with output on the vertical
axis and the variable input on the horizontal axis. The total product curve and the marginal product
curve are commonly used to illustrate the relationship between input and output in the short run.
Long Run Production Function:
• The long run refers to a period during which all inputs in the production process can be varied. In
this time frame, a firm can adjust its plant size, change technology, and make other structural
changes to production.
• In the long run, a firm has the flexibility to adapt to changes in demand or production conditions
by adjusting all factors of production, including capital.
• Firms can experience economies of scale in the long run, where increasing the scale of production
leads to a proportionally larger increase in output. This can result from cost savings and improved
efficiency.
• The long-run production function is also represented graphically, showing how changes in all inputs
impact output. In the long run, there is no fixed input, so the firm can optimize its production
process for the desired level of output.

23. The Law of Variable Proportions
• The law of variable proportions is a short period production
law. It is also called returns to a factor.
• Let us first understand the meaning of variable proportions.
In a production process when only one factor is varied and all
other factors remain constant, as more and more units of
variable factor are employed, the proportion between fixed
and variable factors goes on changing.
• So it is termed as the law of variable proportions. This law
states that if you go on using more and more units of variable
factor (labour) with fixed factor (capital), the total output
initially increases at an increasing rate but beyond a certain
point, it increases at a diminishing rate and finally it falls.
• This law was initially called the law of diminishing returns
Marshall who applied the law only in agriculture sector but
modern economist called it the law of variable proportion and
proposed its applicability to all the sectors of the economy.

24. Assumption of the law
(i) The firm operates in the short run.
(ii) There is no change in technology of
production.
(iii) The production process allows the
different factor ratios to produce
different levels out output.
(iv) All the units of variable factor are
equally efficient.
(v) Full substitutability of factors of
production is not possible.

25. In the above table:-
• Land is considered as fixed factor and labour is variable factor of production.
• As the labour are increased keeping land fixed, TP first increases that the increasing
rate up to the 3rd unit of labour and increases at a diminishing rate up to the 5th
unit of labour. TP is maximum at the 5th unit of labour and becomes stable up to the
6th units of labour and starts to fall.
• MP first increases, becomes maximum at the 3rd unit of labour and thereafter
declines.
• MP is zero at 6th units of labour and thereafter negative.
• AP also increases at first, becomes maximum at the 3rd unit of labour and stable
upto 4th unit of labour, and thereafter declines.
• AP and MP are equal at the 4th unit of labour.
• Though AP declines it never becomes zero.

26. • Stage-I: Increasing Returns to a factor in this phase TPP increases at
an increasing rate and marginal product of variable factor, labour
increases. In the end of this phase MPP is maximum. So, this is the phase
of increasing returns to a factor.
• Stage-II: Diminishing Returns to a factor In this phase TPP increases
but at a diminishing rate MPP declines but remains positive. At the end
of this phase MPP is zero. At this point TPP is maximums. So, this is the
phase of diminishing returns to a factor.
• Stage-III: Negative Returns to a factor In this phase, MPP declines and
it becomes negative. Here the TPP also starts falling. It operates from
the level of output where MPP of labour is zero but subsequently
becomes negative.

27. Law of Returns to Scale
• In the long run all factors of production are variable. No
factor is fixed. Accordingly, the scale of production can be
changed by changing the quantity of all factors of
production.
• “The term returns to scale refers to the changes in output
as all factors change by the same proportion.” Koutsoyiannis
• “Returns to scale relates to the behaviour of total output as
all inputs are varied and is a long run concept”. Leibhafsky
Returns to scale are of the following three types:
1. Increasing Returns to scale.
2. Constant Returns to Scale
3. Diminishing Returns to Scale

28. Explanation:
• In the long run, output can be increased
by increasing all factors in the same
proportion. Generally, laws of returns to
scale refer to an increase in output due
to increase in all factors in the same
proportion. Such an increase is called
returns to scale.
• Suppose, initially production function is
as follows:
P = f (L, K)

29. • Now, if both the factors of production i.e., labour and capital are increased in
same proportion i.e., x, product function will be rewritten as.

30. • The above stated table explains the following three stages of returns to
scale:
1. Increasing Returns to Scale:
• Increasing returns to scale or diminishing cost refers to a situation when all factors of
production are increased, output increases at a higher rate. It means if all inputs are
doubled, output will also increase at the faster rate than double. Hence, it is said to be
increasing returns to scale. This increase is due to many reasons like division external
economies of scale. Increasing returns to scale can be illustrated with the help of a
diagram.
In figure 8, OX axis represents increase in labour and capital while
OY axis shows increase in output. When labour and capital
increases from Q to Q1, output also increases from P to P1 which is
higher than the factors of production i.e. labour and capital.

31. 2. Diminishing Returns to Scale:
• Diminishing returns or increasing costs refer to that production situation, where if all the factors of
production are increased in a given proportion, output increases in a smaller proportion. It means, if inputs
are doubled, output will be less than doubled. If 20 percent increase in labour and capital is followed by 10
percent increase in output, then it is an instance of diminishing returns to scale.
• The main cause of the operation of diminishing returns to scale is that internal and external economies are
less than internal and external diseconomies. It is clear from diagram.
In this diagram , diminishing returns to scale has been shown. On
OX axis, labour and capital are given while on OY axis, output. When
factors of production increase from Q to Q1 (more quantity) but as
a result increase in output, i.e. P to P1 is less. We see that increase
in factors of production is more and increase in production is
comparatively less, thus diminishing returns to scale apply.

32. 3. Constant Returns to Scale:
• Constant returns to scale or constant cost refers to the production situation in
which output increases exactly in the same proportion in which factors of
production are increased. In simple terms, if factors of production are doubled
output will also be doubled.
In figure , we see that increase in factors of production i.e. labour
and capital are equal to the proportion of output increase.
Therefore, the result is constant returns to scale

33. ISO-QUANT CURVE
• The term Iso-quant or Iso-product is composed of two words,
Iso = equal, quant = quantity or product = output.
• Thus it means equal quantity or equal product. Different
factors are needed to produce a good. These factors may be
substituted for one another.
• A given quantity of output may be produced with different
combinations of factors. Iso-quant curves are also known as
Equal-product or Iso-product or Production Indifference
curves. Since it is an extension of Indifference curve analysis
from the theory of consumption to the theory of production.
• According to Peterson “An Iso-quant curve may be defined as
a curve showing the possible combinations of two variable
factors that can be used to produce the same total product.”

34. Assumptions:
1. Two Factors of Production
2. Divisible Factor
3. Constant Technique
4. Possibility of Technical Substitution
5. Efficient Combinations

35. 1. 1 units of labour and 15 units of capital
2. 2 units of labour and 11 units of capital
3. 3 units of labour and 8 units of capital
4. 4 units of labour and 6 units of capital
5. 5 units of labour and 5 units of capital