1. Unit 4
Supply
Objectives:
After going through this unit, you will be able to explain:
Meaning and factors influencing supply
Concept elasticity of supply
Structure:
1.1 Introduction
1.2 Concept of Supply
1.3 Law of supply
1.4 Factors affecting Supply
1.5 Changes in Supply
1.6 Elasticity of Supply
1.7 Price Elasticity of Supply
1.8 Factors affecting elasticity of supply
1.9 Summary
1.10 Key words
1.11 Self assessment questions
1.1 Introduction:
Demand and Supply are the pillars of contemporary market economies. Supply is one
half of the market exchange process; the other is demand. This supply side of the market
is directly connected to the limited resources dimension of the scarcity problem. Firms
having ownership and control over resources (labor, capital, land, and entrepreneurship)
use them to produce the goods and services that satisfy other’s wants and needs.

2. Ownership and control of resources is the ultimate source of supply. This section talks
about supply and supply concepts.
1.2 Concept of Supply
Supply can be defined as the willingness and ability to sell various quantities of a good at
particular prices, during a given time period. Quantity supplied can be defined as the
quantity of a goods or services that sellers are willing and able to sell at a specific supply
price.
1.3 Law of Supply
According to the Law of supply at higher prices, a larger quantity will be supplied than at
lower prices, all other things being equal. This relationship between supply and price of
the commodity can be expressed through the supply curve, which is upward sloping
showing the positive relationship between quantity supplied and price. Consider the
following diagram showing the supply curve.
Price
Supply
0
Quantity

3. The positive relationship between supply and price of a commodity is because when
prices rise, costs take a longer time to adjust as compared to prices. In the meantime per
unit profit increases which further acts as an incentive for the producer.
1.4 Factors influencing supply
Sellers’ ability and willingness to supply goods and services depends on a variety of
factors. Consider some of the:
a) Price: The impact of price on supply of the commodity has already been
described in the law of supply. Quantity supplied is directly proportional to its
price.
b) Factor costs: The prices of inputs used to produce the product, viz., wages, rent,
interest, and normal profit put together have an inverse relationship with price of
the final product. This is because higher costs imply lower margins
c) Technology: Technological advancements have caused tremendous
improvements in manufacturing capabilities and hence have had a positive impact
on supply.
d) Government policy, Taxes and subsidies: Taxes behave as a cost and by
increasing, cause supply to decrease. Subsidies reduce costs and have a positive
relationship with supply. Government policy may also restrict or prohibit the
supply of goods and services in the economy.
e) Price Expectations: Anticipation about price movements in the future also
impact quantity supplied of a commodity in the current time period.
f) Number of Firms: More the number of firms or suppliers in the market, greater
is the supply. As is evident in India post-liberalization entry of foreign firms and
opening of various sectors for private firms have increased the supply.
1.5 Changes in Supply
We now know various factors that influence supply in the market. All this factors
categorized into price and non-price factors can cause supply to,

4. a) Expand/Contract
b) Increase/Decrease
Depending on what underlying factors are triggering a change in supply, it can change in
any of the above two ways. The following table and figure describe these two aspects of
changes in supply.
Changes in supply
Criteria Expansion /Contraction Increase/Decrease
Reason Supply expands or contracts because of Supply increases or decreases
a change in price. because of non-price factors.
Expression Expansion /Contraction in supply are Increase/Decrease in supply is
expressed by a movement along the expressed by a shift of the
supply curve. supply curve itself.
Diagram The following figure describes the two kinds of changes in supply.
Price Price
Expansion Decrease
Contraction
Increase
Quantity Quantity
1.6 Elasticity of Supply
We know from our earlier section on elasticity of demand that elasticity measures the
degree of dependence of one variable on another. Elasticity of supply talks of the
dependency of quantity supplied of a commodity on various factors. We will discuss in
detail about Price Elasticity of Supply.

5. 1.7 Price Elasticity of Supply
Price elasticity of supply can be defined as the degree to which a price change for a
commodity results in a change in its supply. It can be calculated as,
Es = Proportionate change in quantity demanded
Proportionate change in Price
Where Es is the coefficient of price elasticity of supply.
The coefficient of elasticity of supply is positive, because an increase in price is likely to
increase the quantity supplied to the market and vice versa. Besides the greater the slope
of the supply the greater is the elasticity of supply. Consider the following diagram which
exhibits price elasticity of supply.
Price
S1
S2
0
Quantity
In the above figure there are two supply curves:
a) S1 which relatively inelastic, and
b) S2 which relatively elastic

6. The greater the elasticity of supply the greater is the producer’s ability to respond to a
change in the demand in the market. Contrary to this if the elasticity of supply is less the
producer’s response to a change in demand is constrained to that extent.
1.8 Factors that determine elasticity of supply
It is important for the seller to respond to changes in demand in the market. This is
further dependent on the elasticity of supply. The elasticity of supply further depends on
the factors highlighted in the following table,
S.N. Factor For relatively elastic For relatively
supply inelastic supply
1. Idle capacity Plenty of spare Lack of spare
capacity capacity
2. Level of stocks or inventories Stocks of raw Stocks of raw
materials, components materials,
and finished products components and
are high finished products
are low
3. Ease of factor substitution Resources are Resources are
occupationally mobile occupationally not
and production mobile and
process is fairly production process
flexible is fairly inflexible
4. Time Long run Short run
1.9 Summary
This unit discussed the other important force that influences the existence of markets –
the Supply. Various factors affect supply in the market and producers’ capability and
willingness to supply in the market. These include the price of the product, cost of
production, government policy, state of technology, producers’ anticipation about future
price movements, and number of sellers in the market. How much does the seller respond
to a change in these factors further depends on the elasticity of supply. Availability of

7. idle capacity, higher inventory and stock levels, and mobility of factors of production
make supply relatively elastic. In the long run supply tends to be more elastic than in the
short run.
1.10 Key words
a) Supply: The willingness and ability to sell various quantities of a good at
particular prices, during a given time period.
b) Law of supply: At higher prices, a larger quantity will be supplied than at lower
prices, all other things being equal.
c) Factor costs: The prices of inputs used to produce the product, viz., wages, rent,
interest, and normal profit put together.
d) Elasticity of supply: Dependency of quantity supplied of a commodity on
various factors.
e) Price elasticity of supply: The degree to which a price change for a commodity
results in a change in its supply.
1.11 Self assessment questions
1. Explain the concept of supply and law of supply.
2. Distinguish between expansion/contraction and increase/decrease in supply.
3. Write short notes on:
a) Ease of factor substitution
b) Resource costs
4. Explain the concept of elasticity of supply. Based on your knowledge of elasticity
supply show in following diagram which supply curve is more elastic and why?
Price
S1
S2
0
Quantity

8. 5. Discuss various factors that make supply more responsive in the market.
6. According to the Law of supply at higher prices, a larger quantity will be supplied
than at lower prices, all other things being equal.
a) True
b) False
c) Neither true nor false
d) None of the above
7. The positive relationship between supply and price of a commodity is because
when prices rise,
a) Costs take a shorter time to adjust as compared to prices
b) Costs take a longer time to adjust as compared to prices
c) Costs take as much time to adjust as prices
d) None of the above
8. Technological advancements have caused tremendous improvements in
manufacturing capabilities causing supply to,
a) Increase
b) Decrease
c) Not change
d) Can’t say

9. 9. Taxes behave as a cost and by increasing, cause supply to,
a) Decrease
b) Increase
c) Not change
d) None of the above
10. Subsidies reduce costs and have a positive relationship with supply.
a) True
b) False
c) Neither true nor false
d) Both true and false
11. Fill in the blanks:
a) More the number of firms in the market ____________ is the supply.
b) Supply expands or contracts because of a change in ____________.
c) Increase/Decrease in supply is expressed by a ____________ of the supply
curve itself.
d) Price elasticity of supply can be defined as the degree to which a
____________ change for a commodity results in a change in its
____________.
e) The coefficient of elasticity of supply is____________, because an
increase in price is likely to increase the quantity supplied to the market.
f) In the ____________ run supply tends to be more elastic than in
the____________ run.