Theory of SUPPLY & Elasticity of supply: - topic

 Theory of Supply.

  • Supply refers to quantity of goods and services that producers are willing and able to offer at market at various prices during a given period of time.
  • For perishable goods whatever is produced must be sold i.e; supply=stock.
  • For non-perishable goods supply and stock are different.
  • Supply refers to what a firm offered for sale in the market not necessarily mean for what they succeed in selling.
  • Supply is flow concept.

Determinants of Supply

  1. Price of the product
  2. Price of related good.
  3. State of Technology.
  4. Government policies (Taxes).
  5. Time.
  6. Nature of computation and size of industry.
  7. Floods, market structure, war, labour strikes, communal riots.

Law of supply

It explains Direct relation between price and supply.
Quantity of goods produced and offered for sale increase as the price increases and decrease as the price decreases.
Supply curve














Exceptions to Law of supply.

1) Rare commodity
2) Land
3) Supply of labour.

Expansion and contraction of supply.

When the supply of good increased as a result of increase in its price, then it is called there is an expansion of quantity supply and an upward movement on the supply curve.

When the supply of good decreased as a result of decrease in its price, then it is called there is an contraction of quantity supply and an downward movement on the supply curve.

Increase and decrease in supply.

=>When the supply curve shifts towards right as a result of change in one of the factors that influence the quantity supplied other than the commodity's own price, we can that there is increase in supply.
=>Changes in supply as a result of changes occurred in any factors of production other than it's price then there exists the wordings of increase or decrease in supply.
=>Here the shifts take place but not movement. Leftward shift when supply decreased, Rightward shift when supply increased.

Elasticity of Supply

Law of supply does not explain the relationship between percentage change in price and percentage change in supply.
It explains responsiveness of quantity supplied in its good to change in its price.
              Es= (∆q/∆p)×(p/q)

Degrees of Elasticity of supply.











=> There are two methods to calculate elasticity of supply

1)Point Elasticity = (dp/dq) × p/q ,  here d is derivative.
2)Arc Elasticity
  =[ (Q1 - Q2)/ (Q1+Q2)] ×  (p1 - p2)/ (p1+p2)]

EQUILIBRIUM PRICE

Market situation where quantity demanded is equals to quantity supplied
Equilibrium price is also called as market clearance price.

Know more concepts in economics
Elasticity of Demand

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