Chapter IV

Analysis of Supply Curve

Dr. GOPALAKRISHNA B.V.

Faculty in MBA,
SDM, Mangalore
 The concept supply occupies a significant place in
economic theory.
 Supply analysis is related to the behaviour of the
producer – supply of a commodity influenced by
price of commodity.
 In the ordinary language supply mean the stock of
goods in existence.
 It is also mean the amount of good offered for sale
per unit of time.
 In economics, supply mean during a given period of
time quantities of goods which are offered for sale
at particular prices.
 Thus, supply of a commodity may be defined as the
amount of the commodity which the sellers are able
& willing to offer for sale at a particular period a
given period of time.
 Thus, supply is always at a price & in relation to a
period of time.
 The higher the price, the greater will be the quantity
of a commodity that will be supplied by a producer &
vice – versa.
 Therefore, the relationship between price & quantity
supplied is direct and positive.
Factors influences supply
 The quantity supplied of a commodity is not
dependent upon its price alone but on a number of
factors such as –
 Price of other commodities
 The prices of factors used in its production

 The goal of producers &

 The state of technology

 These factors can be written in the form of an equation
known as the supply function
 (supply function)
Sq = f (pq, Pa, Pb…..F1, F2 … G, T)
Sq = Supply of commodity q
f = Functional relationship between price of
commodity & quantity supply
Pq = Price of commodity q
Pa Pb = Prices of other commodities
F1 , F2 = Prices of factors of production
G = Goal of producers
T = State of technology
1. Price of the commodity
 higher the price of commodity the larger

will be the quantity supplied and vice-versa.

2. Prices of other commodities
 A change in the price of other commodity

also affects the supply of commodity

 For instance, if the price of good A rises, the

producer of good B may produce less of

good B & switch over to the production of
good A in order to sell more of it.
3. Price of factors
 If the price of any one factor of production (labour &

capital) used in the production of a commodity increases, it

cost of production will increase.
 As a result, its output will falls & the supply will be

reduced.
 The reverse will happened in the case of fall in the price of

a factor.
4. Goals of Producers
 If a producer aims at maximising profit, he will produce

less of the commodity which involves large risk.

 A producer who aims at maximising his sales will produce

& sell more.

5. State of Technology
 If new & improved methods of production are used, they

tend to increase the supply of commodities.

 The Law of Supply
 Supply of a commodity is functionally related to its
price.
 The law of supply relates to this functional
relationship between price of a commodity & its
supply.
 That is, higher the price, higher will be quantity
supplied & lower the prices lower will be quantity
supplied.
 The law of supply can be stated that “other things
remaining the same, as the price of a commodity
rises, its supply is extended and as the price falls,
its supply is contracted.
 The quantity offered for sale directly varies with price – higher
the price, larger is the supply and vice-versa.
Supply Schedule
 Supply schedule is a statement of various quantities of given
commodity offered for sale at various per unit of time.
 A supply schedule may be individual supply schedule or
market supply schedule.
 Individual supply schedule is a list of prices & quantities
that an individual is willing to produce & sell.
 Whereas the market supply schedule is the sum total of
individual supply schedules.
 Supply Schedule

Individual Supply Market Supply

Schedule Schedule
 Individual Supply Schedule
Prices (per dozen) in Rs Quantities of supplied
4 300
6 400
8 500
10 600
12 700
14 900
 Y S

4
Prices

B 300 600 900 1,200 X

Quantities of Supplied
 Market Supply Schedule of Product
Commodity is identical Aggregate
Price ( in of A, B, and
Rs.) A Firm B Firm C Firm
C

2 000 000 000 000

4 300 400 50 750
6 400 200 200 900
8 500 400 300 1200
10 600 500 400 1500
12 700 600 500 1800
14 900 800 750 2450
 Assumptions of the Law of the Supply
 The number of firms in the market remains the same.
 The scale of production do not change.
 Market prices of related goods remains constant over a
period of time.
 Cost of Production does not change.
 Climatic conditions remains constant.
 Taste and preferences of consumers remains constant.
 Government polices such as taxation policy, trade policy
should be unchanged.
 No changes in transport costs
 No. other inputs are available in the market.
 Feature of the Law of Supply
1. There is a direct relationship between
quantity supplied and price.
2. There are two variables – price and supply –
supply is the dependent variable and price
is an independent variable.
3. This law is not universal in nature – it is
based on certain assumptions – other things
remaining constant.
4. Supply curve usually slopes upward from
left to right.
Prices of related Price Time
commodities

Factors Determining
Cost of Supply
Production Technology

Natural
Govt Policy & Future
Factors
Action Expectations
1. Price of the commodity
 Higher the price of a commodity larger will be
the quantity supply and vice – versa.
 Higher prices always brings profit to producers.
2. Prices of related commodities
 A change in the price of another commodity also
affects the supply of a commodity.
 For instance, if the price of good A rises, the
producer of good B may produce less of good B
and switch over to the production of good A in
order to sell more to make an profit.
3. Prices of factors of production
 If price of factors of production increases – (labour

and capital) – cost of production increases and output

will decline.
 The reverse will happen in the case of a fall in the

price of a factor.
4. Goal of Producers
 If a producer aims at maximising profit, he will

produces less of commodity and will involve large

risks.
 A producer who aims at maximizing his sales will

produce and sell more.

5. State of Technology
 If new and improved methods of production are

used – they tend to increase the supply of

commodities.
6. Number of firms and sellers existence
 Supply in a market depends on the no. of

firms/sellers producing and selling in the market.

 When producer/sellers are few – supply will be

small and vice – versa.

7. Cost of Production
 The cost of production is an important item
affecting the supply.
 Wages, rate of interest, price of machinery

and equipment, raw-material etc influences

on cost of production.
8. Future Expectation
 Seller sells the commodity or supplies on the basis

of the prevailing prices.

 If he feels that future prices will be higher, he will

reduce the present supply of the product.

 If he feels that future prices may fall he will be

tempted to sell more at the current prices.

9. Natural factors
 It is assumed that there is no change in natural factors

such as rain, drought etc – Agro Industries.

 Monsoon failure may result in the reducing of power

generation and eventually lead to curtailment of

production.
10. Change in Government Policy
 Any change in govt policy will affect the supply.

 A fresh tax or levy of excise duties on commodity will

affect the price of the commodity and as a result the

supply will get affected.
 An increase in tax will reduce the supply and granting

of subsidy and incentive will increase the supply.

 Elasticity of Supply
 Supply change due to change in price
 The extent of change in supply in accordance
with the change in price is called elasticity of
supply.
 When, with a little change in price (rise/fall)
there is a considerable change in supply
(rise/fall).
 The elasticity of supply is the degree of
responsiveness of a change in supply to a
change in price on the part of sellers.
 Elasticity of Supply
Es = Percentage Change in Quantity Supply
Percentage Change in Price

Change in Quantity Supply Change in Price

= ÷
Change in price Initially Initial supply

∆Qs P
= *
∆P Qs
Where

∆Qs = Change in Quantity Supply

∆P = Change in Price
 Types of Elasticity of Supply

1. Perfectly elastic supply

2. Perfectly inelastic supply
3. Unitary elastic supply
4. Relatively more elastic supply
5. Relatively less elastic supply
1. Perfectly elastic supply
 When a small change in price lead to an infinitely large
change in the quantity supplied. Es = ∞
Y

S S
P
Price

O Quantities of Supplied X
2. Perfectly inelastic supply
 When a change in price causes no change in

supply whatsoever. Es = 0

Y S

P1

P
Price

P2

S
O M X
Quantity of Supplied
 3. Unit elasticity of supply
 The change in quantity of supply is exactly equal to
the change in price.
 When both are equal the elasticity is said to be
unitary. Es = 1
Y S

P1

P
Prices

O M M1 X
Quantity of supply
 4. Relatively more elastic supply
 It refers to that situation where a proportionate change in the
quantity of supply is much greater than the proportionate
change in price.
 In other words, it refers to that situation where a small
proportionate fall in price of a commodities is followed by a
large proportionate increase in its quantity supply and vice
versa. Es > 1.
Y S

P1
Prices

X
O M M1
Quantity Supply
 5. Relatively less elastic Supply
 It refers to that situation where the proportionate change in the
quantity of supply is much less than the proportionate change
in price.
 In other words, it refers to that situation where a great
proportionate fall in price of a commodities followed by a
small proportionate changes in quantity supply.
Es < 1. Y S

P1

P
Price

O M M1 X
Quantity Supply
 Table - Types of Price Elasticity of Supply

Sl No. Types of Numerical Description Shape of Curves

ES Expression
1. Perfectly ∞ Infinite Horizontal
Elastic
2. Perfectly 0 Zero Vertical
Inelastic
3. Unit Elastic 1 One Rectangular
Hyperbola
4. Relatively >1 More than Flat
Elastic One
5. Relatively <1 Less than Steep
Inelastic One
 Types of Elasticity of Supply

S5
S1 S5 = 0
S
S1 = < 1
S
3 S3 = 1
S2 = > 1
Pric S2
e S4 = ∞

S4

Quantity of Supply