SUPPLY ANALYSIS

What is Supply?

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.

• Supply is always referred to in relation to price and time.

• Supply is what the seller is able and willing to offer.

Law of Supply

• Under the ceteris paribus assumption, the law of supply may be stated as follows:

• “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.”

Assumptions under the Law of Supply• It is based on ceteris paribus assumptions:• 1. Cost of production is unchanged.• 2. Technique of production is unchanged.• 3. Fixed scale of production.• 4. Government policies are unchanged.• 5. No change in Transport costs.• 6. No speculation.• 7. The prices of other goods are held constant.

Extension (Expansion) and Contraction of Supply:

With a rise in price, if the supply rises, it is extension of supply.

With a fall in price if the supply declines, it is contraction of supply.

Increase and Decrease in supply:

If more supply is forthcoming ‘without a change in price’, it is called increase in supply.

If less supply is forthcoming ‘without a change in price’, it is called decrease in supply.

Factors influencing change in supply • 1. Cost of Production.• 2. Technique of production.• 3. Natural Factors.• 4. Government Policies.• 5. Transport Facilities.• 6. Business combines.• 7. Goals of firms• 8. Price of that commodity • 9. Prices of related commodities• 10. Expectations of future level of prices.

Elasticity of SupplyElasticity of supply is defined as “the degree of responsiveness of supply

to a given change in price”.

Elasticity of supply is the ratio of percentage change or proportionate change in quantity supplied to the percentage or proportionate change in price.

i.e. Proportionate change in quantity supplied

Proportionate change in price

Q

Q Q x P

es = ---------- = Q P

P

P

Factors determining Elasticity of Supply1. Time Period – short period relatively inelastic2. Nature of commodities – perishable & durable. – 3. Time period -- long period – relatively elastic3. Scale of Production – small scale - inelastic

large scale – elastic.4. Technique of Production – advanced technology– elastic. Labour

intensive – less elastic.5. Size of the Firm & No. of products produced.

Large firm – supply more elastic.6. Natural Factors – climatic conditions affect supply of agricultural

products7. Nature of Production.- by their very nature – inelastic e.g., painting

& artworks8. Mobility of factors of production – high mobility – elastic

immobility – inelastic.