Supply

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Questions:

Generic 3

8 x 3 = 24

The price of a commodity is Rs.10 per unit and its quantity supplied at this price is 500 units. If its price falls by 10 per cent and quantity supplied falls to 400 units, calculate its price elasticity of supply.

As a result of fall in price of the commodity by 10%, the quantity supplied also falls 15%. Comment on PES.

The measure of price elasticity of demand of a normal good carries minus sign while price elasticity of supply carries plus sign. Explain why?

Differentiate between decrease in supply and contraction in supply (decrease in quantity supplied).

What is the supply curve of a firm in the short run?

How does an increase in the number of firms in a market affect the market supply curve?

How does an increase in price of an input affect the supply curve of a firm?

Consider a market with two firms. In the following table, columns labelled as SS₁ and SS₂ give the supply schedules of firm 1 and firm 2 respectively. Compute the market supply schedule.

Price (Rs)	SS₁(Kg)	SS₂ (Kg)
0	0	0
1	0	0
2	0	0
3	1	0
4	2	0.5
5	3	1
6	4	1.5
7	5	2
8	6	2.5

1 Marks

5 x 1 = 5

Does a change in producers' technology lead to a movement along the supply curve or a shift in the supply curve? Does a change in price lead to a movement along the supply curve or a shift in the supply curve?

10.

What is meant by perfectly elastic supply of a commodity?

11.

Price elasticity of supply of a good is 0.8. Is the supply 'elastic' or 'inelastic', and why?

12.

What causes an upward movement along the supply curve of a commodity?

13.

What causes a downward movement along a supply curve?

Multiple Choice Question

5 x 1 = 5

14.

In a very short period market:

(a)

The supply is fixed

(b)

The demand is fixed.

(c)

Demand and supply are fixed

(d)

None of them

15.

Elasticity of supply is greater than one when

(a)

Proportionate change in quantity supplied is more than the proportionate change in price.

(b)

Proportionate change in price is greater than the proportionate change in quantity supplied.

(c)

Change in price and quantity supplied are equal

(d)

None of them

16.

Elasticity of supply is zero means

(a)

perfectly inelastic supply

(b)

perfectly elastic supply

(c)

imperfectly elastic supply

(d)

none of them

17.

Supply is the

(a)

limited resources that are available with the seller.

(b)

cost of producing a good.

(c)

entire relationshipbetweenthe quantity supplied and the price of good

(d)

willingness to produce a good if the technology to produce it becomes available

18.

The supply of a good refers to:

(a)

Actual production of the good

(b)

Total existing stock of the good

(c)

Stock available for sale

(d)

Amount of the good offered for sale at a particular price per unit of time.

Generic 6

1 x 6 = 6

19.

Distinguish between change in quantity supplied and change in supply. Use diagram.

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Answers Key:

Generic 3

8 x 3 = 24

Original Quantity (Q) = 500 units	% fall in Price = 10%
New Quantity (Q₁) = 400 units	Elasticity of Supply (ES) =?
Change in Quantity (\(\triangle\)Q) = 100 units

Percentage change in supply = \({{\triangle Q}\over{Q}}\times 100={{100}\over{500}}\times 100=20\%\)
ES = \({{Percentage\ Change\ in\ supply}\over {Percentage\ Change\ in\ Price}}={{20\%}\over{10\%}}=2\)
ES = 2 (Supply is highly elastic as ES > 1) ES is always positive due to direct relationship between price and quantity supplied.

\(ES={{Percentage\ change\ in\ quantity\ supplied}\over{Percentage\ change\ in\ price}}\)
\(={{15\%}\over{10\%}}=1.5\)
PES = 1.5 [More than unitary Elastic or elastic Supply]

(i) Mathematically speaking, price elasticity of demand is case of Normal good is negative, since the change in quantity demanded is in opposite direction to the change in price as there is inverse relationship exists between price of Normal Good and Quantity demanded for Normal Good.
(ii) Price elasticity of supply in case of Normal good is positive, since the change in quantity supplied is in same direction to the change in price as there is positive relationship exists between price of Normal Good and Quantity supplied for Normal Good.
(iii) So, in Nutshell, 'Minus sign' attached with price elasticity of demand shows Law of Demand and 'Plus sign' attached with price elasticity of supply shows Law of Supply

Decrease in Supply

Basis

Contraction in Supply

A decrease in supply means that producers now supply less at a given price level

Meaning

It states that fall in quantity supplied due to the fall in price of the commodity

(i) Rise in the prices of remuneration of factors of production.
(ii) Rise in the prices of other goods.
(iii) When the technology becomes outdated.
(iv) Change in the objective of producer (decrease supply at the same price).
(v) Taxation policy of government rises.

Cause

It is caused by fall in price of the commodity

Price	Supply
4 4	10 8

Schedule

Price	Supply
2 1	10 8

Diagram

(i) In the short period, supply is relatively less elastic as firm can change the supply by changing the variable factors only, as fixed factors remain fixed during short period.
(ii) The supply curve during short period is inelastic, i.e., percentage change in quantity supplied is less than percentage change in price as shown below:

(i) When the number of firms in the industry increases, market supply also increases due to large number of producers producing that commodity.
(ii) So, due to increase in market supply, the supply curve shifts rightward as shown.

(i) This also influences the supply since price of inputs (rent, wages, interest, profit) constitutes the cost of production of a commodity.
(ii) An increase in the price of an input may lead to rise in cost of production, which will thereby decrease the production of a commodity shifting the supply curve to the left as shown.

Price (Rs)	SS₁(Kg)	SS₂ (Kg)	Market supply (SS₁+SS₂)
0	0	0	0
1	0	0	0
2	0	0	0
3	1	0	1
4	2	0.5	2.5
5	3	1	4
6	4	1.5	5.5
7	5	2	7
8	6	2.5	8.5

1 Marks

5 x 1 = 5

()
A change in producers'. technology leads to a shift in the supply curve. A change in price leads to a movement along the supply curve,

10.

()
When quantity supplied changes and price remains constant, then the supply of such commodity is said to be perfectly elastic

11.

()
When PES = 0.8, PES is inelastic because percentage change in quantity supplied is less than percentage change in price.

12.

()
Rise in price and rise in quantity supplied, i.e., expansion in supply.

13.

()
Fall in price and fall in quantity supplied, i.e., contraction in supply.

Multiple Choice Question

5 x 1 = 5

14.

(a)
The supply is fixed

15.

(a)
Proportionate change in quantity supplied is more than the proportionate change in price.

16.

(a)
perfectly inelastic supply

17.

18.

(d)
Amount of the good offered for sale at a particular price per unit of time.

Generic 6

1 x 6 = 6

19.

Changes in quantity supplied

Basis

Change in supply

The change in quantity supplied due to the change in price of the commodity.

Meaning

Change in supply due to the change in factors other than price

Movement along the supply curve
(i) Expansion in supply
(ii) Contraction in supply

Alternative Name

Shift in supply curve
(i) Increase in supply
(ii) Decrease in supply

(i) It states that rise in quantity supplied due to the rise in price of the commodity
(ii) It states that fall in quantity supplied due to the fall in price of the commodity

Meaning

(i) An increase in supply means that producers now supply more at a given price level
(ii) A decrease in supply means that producers now supply less at a given price level