Supply analysis… Law of supply - Table of supply schedule › Economics Basics
Basic Principles of Economics, Market Structures and Cost Analysis
Basic Principles of Economics:
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Supply analysis
(Supplier /Producer point of view)
Unlike a demand curve, a supply curve has a positive slope, reflecting the law of supply. The law of supply states that quantity supplied is positively related to price; i.e., firms offer larger amounts at higher prices and smaller amounts at lower prices. In this case, price is the reward for production so that higher market prices bring forth larger quantities. Higher prices provide firms with extra funds to purchase more resources or inputs to in¬crease production. Higher prices also act as a signal to producers that consumers value their goods highly and desire more of them.Producer or manufacturer of the goods always thinks to supply more goods at high price for the consumer to get more income .Like demand, supply is not a given quantity—that is called quantity supplied. It is a relationship between price and quantity. As the price of a good rises, producers are generally wants to sell in larger quantity. The reverse is equally true: as price decreases, so the supplier don’t like to sell or supply in large quantity. Like demand, supply can also be described in a table or a graph.
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Law of supply - Table of supply schedule
The relationship between price and quantity supplied is usually a positive relationship. A rise in price is associated with a rise in quantity supplied.Definitions
— In the words of Dooley. "The law of supply states that other things being equal the higher the price, the greater the quantity supplied or the lower the price, the smaller the quantity supplied."— According to Lipsey, "The law of supply states that other things being equal, the quantity of any commodity that firms will produce and offer for sale is positively related to the commodity's own price, rising when price rises and falling when price falls."
As the price of good increases, suppliers will attempt to maximize profits by increasing the quantity of the product sold.
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Determinants of supply
Innumerable factors and circumstances could affect a seller’s willingness or ability to produce and sell a good. Some of the more common factors are:1. cost factor of production
Cost of production depends on the factors like• price of raw materials
• rents and interest on capital
• cost of machinery
• payments to human resources (wages and salaries)
• transportation charges
If cost of production is high normally supply will be low
2. state of technology
Use of latest technology decreases the cost of production and increases the production capacity which increases supply of goods.3. factors outside the economic sphere
Supply depends upon the below said factors. These factors should not arise if they arise; they affect the supply directly or indirectly.• Whether conditions
• Floods
• Wars
• Epidemics (unexpected situations)
4.tax and subsidy
If tax subsidy (charge less tax) is given by the government the production cost decreased. If that is not there production cost raises. Finally the production will be low and effects to decrease in supply.[ Index ▲ ]
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Supply Function
SX = Supply of goods
PX = Price
PF = Factor input employed (used) for production.
• Raw material
• Human resources
• Machinery
O = Factors outside economic sphere.
T = Technology.
t = Taxes.
S = Subsidies
There is a functional (direct) relationship between price and supply.
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Elasticity of supply
The Price Elasticity of Supply measures the rate of response of quantity demand due to a price change. If you've already read Elasticity of Demand and understand it, you may want to just skim this section, as the calculations are similar.Definitions
— According to Lipsey, "Elasticity of supply is the ratio of percentage change in quantity supplied over the percentage change in price."— In the words of Prof. Bilas, "Elasticity of supply is defined as the percentage change in quantity supplied divided by percentage change in price."
Price elasticity of supply measures the relationship between change in quantity supplied and a change in price. The formula for price elasticity of supply is:
∆Q =change in the demand.(difference in demand)
• ∆P=change in the price.(difference in the price)
• P1=initial price. (first price/ old price)
• Q1=initial demand. (first demand/ old demand)
The value of elasticity of supply is positive, because an increase in price is likely to increase the quantity supplied to the market and vice versa.
Calculating the Price Elasticity of Supply
You may be asked "Given the following data, calculate the price elasticity of supply when the price changes from $9.00 to $10.00" Using the chart on the bottom of the page, I'll walk you through answering this question.First we need to find the data we need. We know that the original price is $9 and the new price is $10, so we have Price(OLD)=$9 and Price(NEW)=$10. From the chart we see that the quantity supplied (make sure to look at the supply data, not the demand data) when the price is $9 is 150 and when the price is $10 is 110. Since we're going from $9 to $10, we have Q Supply(OLD)=150 and Q Supply(NEW)=210, where "Q Supply" is short for "Quantity Supplied". So we have:
• Price(OLD)=9
• Price(NEW)=10
• QSupply(OLD)=150
• QSupply(NEW)=210
To calculate the price elasticity, we need to know what the percentage change in quantity supply is and what the percentage change in price is. It's best to calculate these one at a time.
Calculating the Percentage Change in Quantity Supply
The formula used to calculate the percentage change in quantity supplied is:(QSupply(NEW) - QSupply(OLD)) / QSupply(OLD)
By filling in the values we wrote down, we get:
(210 - 150) / 150 = (60/150) = 0.4
So we note that % Change in Quantity Supplied = 0.4 (This is in decimal terms. In percentage terms it would be 40%). Now we need to calculate the percentage change in price.
Calculating the Percentage Change in Price
Similar to before, the formula used to calculate the percentage change in price is:(Price(NEW) - Price(OLD)) / Price(OLD)
By filling in the values we wrote down, we get:
(10 - 9) / 9 = (1/9) = 0.1111
We have both the percentage change in quantity supplied and the percentage change in price, so we can calculate the price elasticity of supply.
Final Step of Calculating the Price Elasticity of Supply
We go back to our formula of:PEoS = (% Change in Quantity Supplied)/(% Change in Price)
We now fill in the two percentages in this equation using the figures we calculated.
PEoD = (0.4)/(0.1111) = 3.6
When we analyze price elasticities we're concerned with the absolute value, but here that is not an issue since we have a positive value. We conclude that the price elasticity of supply when the price increases from $9 to $10 is 3.6.
Five Types of Elasticities of Supply:
1. Unit Elastic Supply: When change in price of X brings about exactly proportionate change in its quantity supplied then supply is unit elastic i.e. elasticity of supply is equal to one, e.g. if price rises by 10% and supply expands by 10% then, change in the quantity supplied the supply is relatively inelastic or elasticity of supply is less than one.Es = % change in Quantity Supplied of X
% change in price of X
2. Relatively Elastic Supply: When change in price brings about more than proportionate change in the quantity supplied, then supply is relatively elastic or elasticity of supply is greater than one.
3. Perfectly Inelastic Supply: When a change in price has no effect on the quantity supplied then supply is perfectly inelastic or the elasticity of supply is zero.
4. Perfectly Elastic Supply: When a negligible change in price brings about an infinite change in the quantity supplied, then supply is said to be perfectly elastic or elasticity of supply is infinity.
All the five types of Elasticities of supply can be shown by different slopes of the supply curve. Fig. (1) Shows the supply is unit elastic because change in price from OP to OP1 brings about exactly proportionate change in the quantity supplied of commodity X viz., from OM to OM1. In this case Es = 1.
Fig (4) shows that supply is perfectly inelastic because change in price of X from OP to OP1 has absolutely no effect on quantity supplied of X. in this case Es = 0. Thus, if the supply curve is vertical, i.e. parallel to Y-axis it represents perfectly inelastic supply.
Hence, the five different types of elasticities of supply can be shown by five different slopes of supply curve.
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The Model of Supply and Demand (equilibrium)
Equilibrium is defined to the price-quantity pair where the quantity demanded is equal to the quantity supplied, represented by the intersection of the demand and supply curves.In words, equilibrium exists if the amount sellers are willing to sell is equal to the amount buyers are willing to buy.
The market price of a good is determined by both the supply and demand for it. In 1890, English economist Alfred Marshall published his work, Principles of Economics, which was one of the earlier writings on how both supply and demand interacted to determine price. Today, the supply-demand model is one of the fundamental concepts of economics. The price level of a good essentially is determined by the point at which quantity supplied equals quantity demanded. To illustrate, consider the following case in which the supply and demand curves are plotted on the same graph.
If we combine the supply and demand tables in earlier sections, we get the table below. It should be obvious that the price of $3.00 is the equilibrium price and the quantity of 70 is the equilibrium quantity. At any other price, sellers would want to sell a different amount than buyers want to buy.
Supply and Demand Together at Last
Price of
Widgets Number of Widgets
People Want to Buy Number of Widgets
Sellers Want to Sell
$1.00 100 10
$2.00 90 40
$3.00 70 70
$4.00 40 140
The same information can be shown with a graph. On the graph, the equilibrium price and quantity are indicated by the intersection of the supply and demand curves.
