Supply: Determination and elasticity
The emphasis on ability indicates that it is the effective supply that is important. We may distinguish between intended (ex ante) supply and actual (ex post) supply. We may also distinguish between individual supply and market supply.
THE SUPPLY of any commodity means the quantity of that commodity that the producers (sellers) are willing and able to offer for sale at the given price over a given period of time. The emphasis on ability indicates that it is the effective supply that is important. We may distinguish between intended (ex ante) supply and actual (ex post) supply. We may also distinguish between individual supply and market supply. The market supply is the sum of the supply of individual producers at any time. The individual supply of any commodity depends upon the following factors:
- Price of the commodity;
- Prices of other commodities;
- Prices of the factors of production;
- State of technology; and
- Objectives of the producer.
Apart from these factors, market supply depends additionally on the following factors:
- The number of producers: Larger is the number of producers producing the commodity, larger will be its market supply;
- The seasonal factors: If the seasonal factors are favourable, market supply becomes larger. For example, if the harvest is good because of good rains, the market supply of the agricultural products would be larger; and
Other natural factors like floods, storms, droughts negatively affect the market supply, whereas good irrigational facilities and other supports to the agricultural sector positively affect the market supply.
Let us now briefly look at each of the determinants of individual supply:
Price of the commodity: We know that under the assumption of other factors being given, the quantity of the commodity that is supplied over a given period of time is directly related to its price. In other words, the quantity supplied increases as price increases and decreases as price decreases. This relationship between the quantity supplied and price is termed as the law of supply, can be depicted both by a table (called the supply schedule) and by a curve (called the supply curve). In the case of indivisible commodities, it is depicted by bar diagrams. The direct relationship between the quantity supplied and priced, when depicted graphically, gives an up-ward supply curve or bar diagram.
Prices of other commodities: As the price of another commodity (which the producer can produce) rises, it becomes worthwhile for the producer to shift some of his resources to the production of the other commodity. Consequently, the supply of the initial commodity falls. Thus, it is shown that if the price of the other commodity rises, the supply of the initial commodity falls. By a similar argument, it can be shown that if the price of the other commodity falls, the supply of the initial commodity rises.
There is, thus, an inverse relationship between the price of other commodity and the supply of the given commodity. This relationship produces a downward sloping curve.
Prices of the factors of production: As the factor prices rise the total cost rises too and the producer is inclined to reduce the supply of the commodity. Similarly, as the factor prices fall the total cost falls and the producer is inclined to increase the supply of the commodity. Such a relationship is once again inverse and produces a downward sloping curve.
State of technology: With improved technology the total cost may fall and this will lead to a rise in the quantity supplied. On the other hand, if the technology is poor, the total cost may rise and this will result in a fall in the quantity supplied.
Objectives of the producer: The producer may aim either at (a) maximising money income, or (b) maximising non-monetary income. Under (b) he aims at earning goodwill or building-up his reputation as a producer. Out of these two objectives, objective (a) is more common. Other things being equal, the amount supplied will depend upon whether (a) is true or (b) is true. It will be different in the two cases. At the same price, the amount supplied may be smaller when (a) is true; it may be larger when (b) is true.
Let us now briefly look at the elasticity of supply:
The elasticity of supply measures the degree of response of quantity supplied to changes in its determinants. In terms of monetary determinants, we may distinguish between three kinds of elasticity of supply:
Price of the commodity: We know that under the assumption of other factors being given, the quantity of the commodity that is supplied over a given period of time is directly related to its price. In other words, the quantity supplied increases as price increases and decreases as price decreases. This relationship between the quantity supplied and price is termed as the law of supply, can be depicted both by a table (called the supply schedule) and by a curve (called the supply curve). In the case of indivisible commodities, it is depicted by bar diagrams. The direct relationship between the quantity supplied and priced, when depicted graphically, gives an up-ward supply curve or bar diagram.
Prices of other commodities: As the price of another commodity (which the producer can produce) rises, it becomes worthwhile for the producer to shift some of his resources to the production of the other commodity. Consequently, the supply of the initial commodity falls. Thus, it is shown that if the price of the other commodity rises, the supply of the initial commodity falls. By a similar argument, it can be shown that if the price of the other commodity falls, the supply of the initial commodity rises.
There is, thus, an inverse relationship between the price of other commodity and the supply of the given commodity. This relationship produces a downward sloping curve.
Prices of the factors of production: As the factor prices rise the total cost rises too and the producer is inclined to reduce the supply of the commodity. Similarly, as the factor prices fall the total cost falls and the producer is inclined to increase the supply of the commodity. Such a relationship is once again inverse and produces a downward sloping curve.
State of technology: With improved technology the total cost may fall and this will lead to a rise in the quantity supplied. On the other hand, if the technology is poor, the total cost may rise and this will result in a fall in the quantity supplied.
Objectives of the producer: The producer may aim either at (a) maximising money income, or (b) maximising non-monetary income. Under (b) he aims at earning goodwill or building-up his reputation as a producer. Out of these two objectives, objective (a) is more common. Other things being equal, the amount supplied will depend upon whether (a) is true or (b) is true. It will be different in the two cases. At the same price, the amount supplied may be smaller when (a) is true; it may be larger when (b) is true.
Let us now briefly look at the elasticity of supply:
The elasticity of supply measures the degree of response of quantity supplied to changes in its determinants. In terms of monetary determinants, we may distinguish between three kinds of elasticity of supply:
- Price elasticity of supply;
- Cross price elasticity of supply; and
- Factor cost elasticity of supply.
Let us briefly look at these:
Price elasticity of supply measures the degree of response of the quantity supplied of the commodity to a change in the price of the commodity and is given by the proportional (or percentage) change in the quantity supplied of the commodity divided by the proportional (or percentage) change in price of the commodity. Since quantity supplied varies directly with price, there is no need to put a minus sign in the above expression. The price elasticity of supply can also be expressed when the initial price and quantity supplied refer to point A of the supply curve and also when the initial price and quantity supplied refer to the other point B of the supply curve. Both the expressions will give the same results. As long as the observed changes in price and quantity supplied are very small, the elasticity is termed as the point price elasticity of supply, but when the changes become large, ie, we operate on an arc of the supply curve, the two expressions will give different results. In that case we require finding the arc price elasticity of supply, the formula for which is different from the one that determines the point price elasticity of supply.
The meanings of cross price elasticity and factor cost elasticity of supply have already been made clear. The other aspects of these elasticity can be dealt with on the lines of the discussion relating to the price elasticity of supply.
Let us now look at the degrees of elasticity:
No matter which elasticity of supply are we discussing, it may have various degrees. This is the same thing as saying that from the point of view of elasticity, supply can be classified into five distinct categories:
Perfectly elastic supply: This results when the producers are willing to sell all that is available of the commodity at the given price but are unwilling to sell any at a slightly lower price. In other words, it means that the elasticity of supply tends to infinity or supply is said to be perfectly elastic;
Relatively elastic supply: This means that the quantity supplied changes by a larger proportion (or percentage) than the change in price. In other words, the elasticity of supply is greater than unity but less than infinity, or supply is said to be relatively elastic;
Unitary elastic supply: This means that the quantity supplied changes exactly by the same proportion (or percentage) as does the price. This implies that the elasticity of supply is unity, or supply is said to be unitary elastic;
Relatively inelastic supply: This means that the quantity supplied changes by a smaller proportion (or percentage) than the change in price. In other words, the elasticity of supply is less than unity but greater than zero, or supply is said to be relatively inelastic;
Perfectly inelastic supply: This means that the quantity supplied does not change in response to changes in price. The elasticity in this case is said to be zero, or the supply is said to be perfectly inelastic.
Price elasticity of supply measures the degree of response of the quantity supplied of the commodity to a change in the price of the commodity and is given by the proportional (or percentage) change in the quantity supplied of the commodity divided by the proportional (or percentage) change in price of the commodity. Since quantity supplied varies directly with price, there is no need to put a minus sign in the above expression. The price elasticity of supply can also be expressed when the initial price and quantity supplied refer to point A of the supply curve and also when the initial price and quantity supplied refer to the other point B of the supply curve. Both the expressions will give the same results. As long as the observed changes in price and quantity supplied are very small, the elasticity is termed as the point price elasticity of supply, but when the changes become large, ie, we operate on an arc of the supply curve, the two expressions will give different results. In that case we require finding the arc price elasticity of supply, the formula for which is different from the one that determines the point price elasticity of supply.
The meanings of cross price elasticity and factor cost elasticity of supply have already been made clear. The other aspects of these elasticity can be dealt with on the lines of the discussion relating to the price elasticity of supply.
Let us now look at the degrees of elasticity:
No matter which elasticity of supply are we discussing, it may have various degrees. This is the same thing as saying that from the point of view of elasticity, supply can be classified into five distinct categories:
Perfectly elastic supply: This results when the producers are willing to sell all that is available of the commodity at the given price but are unwilling to sell any at a slightly lower price. In other words, it means that the elasticity of supply tends to infinity or supply is said to be perfectly elastic;
Relatively elastic supply: This means that the quantity supplied changes by a larger proportion (or percentage) than the change in price. In other words, the elasticity of supply is greater than unity but less than infinity, or supply is said to be relatively elastic;
Unitary elastic supply: This means that the quantity supplied changes exactly by the same proportion (or percentage) as does the price. This implies that the elasticity of supply is unity, or supply is said to be unitary elastic;
Relatively inelastic supply: This means that the quantity supplied changes by a smaller proportion (or percentage) than the change in price. In other words, the elasticity of supply is less than unity but greater than zero, or supply is said to be relatively inelastic;
Perfectly inelastic supply: This means that the quantity supplied does not change in response to changes in price. The elasticity in this case is said to be zero, or the supply is said to be perfectly inelastic.
Login
 Login through Social ID
|
Not finding what you are looking for? Search here.
