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Dr.K.

Baranidharan
Present by

Engineering Economics & Financial Accounting

Ee&fa
17 August 2013 2

LAW OF SUPPLY

Law of Supply
Law of Supply- refers to the relationship between price and the quantity of a good or service that firms are willing to produce. The higher the price of the product leads to more supplies and more companies making the product.

Price
As price increases

Supply
Quantity supplied increases

Price
As price falls

Supply
Quantity supplied falls

SUPPLY
Quantity Supplied refers to the amount (quantity) of a good that sellers are willing to make available for sale at alternative prices for a given period.

Faculty of Business and Economics (FBE), The IIPM, New Delhi

Price
Law of Supply The law of supply states that,

other things equal, the quantity supplied of a good rises when the price of the good rises.
Faculty of Business and Economics (FBE), The IIPM, New Delhi

The Supply Schedule and the Supply Curve


The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied. The supply curve is a graph of the relationship between the price of a good and the quantity supplied. Other thing being equal

Faculty of Business and Economics (FBE), The IIPM, New Delhi

Table 4-4: Bens Supply Schedule


Price of Icecream Cone ($)
0.00 0.50 1.00 1.50 2.00 2.50 3.00

Quantity of cones Supplied


0 0 1 2 3 4 5

Faculty of Business and Economics (FBE), The IIPM, New Delhi

Figure 4-5: Bens Supply Curve


Price of Ice-Cream Cone

$3.00 2.50

2.00 1.50 1.00 0.50

10

12

Quantity of Ice-Cream Cones

Faculty of Business and Economics (FBE), The IIPM, New Delhi

Elasticity of supply
The degree of responsiveness of the quantity of a commodity applied for a small change in its price.
= = 1

Faculty of Business and Economics (FBE), The IIPM, New Delhi

Types of elasticity
A)perfect elasticity or infinite elasticity of supply (Es = ) Any quantity can be supplied it a given price and there is no need to increase the price On the other hand the firm can even stop the supply completely. But this situation is not found in the real world and is only a hypothetical case. Curve: the shape of the line is horizontal and parallel to the x-axis
Faculty of Business and Economics (FBE), The IIPM, New Delhi

Perfectly elasticity or infinite elasticity of supply


Y

Quantity supplied

Faculty of Business and Economics (FBE), The IIPM, New Delhi

B) perfectly inelasticity supply ((Es = 0) Supply remain constant irrespective of the changes in price. Other words the firm is completely insensitive to the price change. Curve; the shape of the supply curve is a vertical line parallel to the y axis
Faculty of Business and Economics (FBE), The IIPM, New Delhi

PERFECTLY ELASTICITY OF SUPPLY


Y

price

Quantity supplied

Faculty of Business and Economics (FBE), The IIPM, New Delhi

UNITY ELASTICITY ((Es = 1)

The percentage change in quantity supplied is equal to the percentage change in price
Faculty of Business and Economics (FBE), The IIPM, New Delhi

Unit elasticity
Es = 1
Y S price

Quantity supplied

Faculty of Business and Economics (FBE), The IIPM, New Delhi

RELATIVELY ELASTIC ((Es 1)

The elasticity of supply is greater than 1 the supply is said to be elastic. If the price increase by 10% the supply increase by more than 10% Conversely, if the price falls by 10% the supply falls by more than 10%
Faculty of Business and Economics (FBE), The IIPM, New Delhi

Es 1
Y

price

Quantity supplied

Faculty of Business and Economics (FBE), The IIPM, New Delhi

RELATIVELY INELASTICITY SUPPLY (Es 1)

The % change in quantity supplied is less than % change in price. Supply is said to be inelasticity.
Faculty of Business and Economics (FBE), The IIPM, New Delhi

RELATIVELY INELASTIC SUPPLY


Es 1
Y

price

Quantity supplied

Faculty of Business and Economics (FBE), The IIPM, New Delhi

Dr.K.Baranidharan
THANK YOU