Supply elasticity

supply of elasticity

1. WELCOME

2. TOPIC : SUPPLY ELASTICITIES AND THEIR MANAGERIAL USES :

3. INTRODUCTION SUPPLY : Supply is the quantity of a commodity which is actually offered for sale at a given price during some particular time. Supply is that part of stock which is actually brought into market. Supply is a part of stock which a seller is ready to sell at a certain price during a certain time.

4. LAW OF SUPPLY: It states that “other things remaining the same , quantity supplied of a commodity is directly related to the price of the commodity.” Supply schedule: it is a tabular statement that gives the law of supply. Supply curve :it shows graphically the direct relationship between quantity supplied of a commodity and its price.

5. REASONS BEHIND UPWARD SLOPING OF SUPPLY CURVE: Law of diminishing marginal utility: The law states that a more units of the variable factor are employed, the addition made to total production falls that is cost of production rises .Thus ,more quantity is supplied only at higher prices so as to cover the rise of cost of production. Goal of profit maximisation : The aim of producers is to maximise profits .The aim can be achieved by raising the price of goods .At higher price producers increase the supply of goods.

6. SUPPLY FUNCTION : It is the functional relationship between quantity supplied of a commodity and factors affecting it. S x = f(P x ,P z, T, C ,G p) where, S x = supply of a commodity. f =function of. P x = price of commodity x. P z = price of related goods ,z . T = technological changes C = Cost of production. G p = government policy.

7. HOW RELATED????? Price of the commodity : At higher price, producer offers more quantity of the commodity for sale and at a lower price , less quantity of commodity is offered for sale. Price of related goods : Supply of a commodity depends upon the price of related goods specially substitute goods . If the price of a commodity remains constant and the price of substitute goods , z increases , the producer prefers to produce z , as a result supply of commodity b x reduces and that of substitute z will increase .Thus an increase in price of substitute goods will lead to decrease in supply curve of other good and vice versa. .

8. State of technology: If there is a change in technique of production leading to fall in the cost of production, supply of commodity increases. Cost of production : A change in cost of production that is prices of factors of production also affects the supply , if wages , labour or price of raw material increase them MC of production will rise . As a result supply of goods will fall because producers of goods would prefer to produce some other commodities that can be procured at a lower cost. Government policy: If heavy excise taxes are imposed on a commodity ,it will discourage producers and as a result supply will decrease . it is because excise duty is levied on the total cost of a firm.

9. ELASTICITY OF SUPPLY

10. PRICE ELASTICITY OF SUPPLY PRICE ELASTICITY OF SUPPLY IS DEFINED AS THE RESPONSIVENESS OF QUANTITY SUPPLIED OF A COMMODITY TO CHANGE IN ITS OWN PRICE. Es = Percentage Change in Quantity Supplied _______________________________________________________________________________ percentage Change in Price = ∆Q P _____________ . ____________ ∆P Q positive sign indicates that price and quantity of a good are positively related and vice-versa.

11. DETERMINANTS OF ELASTICITY OF SUPPLY TIME FACTOR NATURE OF GOOD PRODUCTION CAPACITY PRODUCTION METHODS AND TECHNIQUES STAGE OF LAW OF SUPPLY FUTURE PRICE EXPECTATION NUMBER OF PRODUCTS BEING PRODUCED BY AN INDUSTRY.

12. DIFFERENT TYPES OF ELASTICITY OF SUPPLY

13. PERFECTLY INELASTIC SUPPLY (Es=0) When supply of a commodity does not change irrespective of any change in its price

14. INELASTIC SUPPLY (0<Es<1) When percentage change in quantity supplied is less than percentage change in price.

15. UNITARY ELASTIC SUPPLY (Es=1) Percentage change in quantity supply equals the percentage og change in price.

16. ELASTIC SUPPLY (1<Es< ∞ ) When percentage of change in quantity supply is more than the percentage of change in price.

17. PERFECTLY ELASTIC SUPPLY(Es= ∞ ) When its supply expands(rise) or contacts(falls) to any extent without any change in the price.

18. Coeff. of Es Types of Es Description Shape of supply curve Es = 0 Perfectly inelastic supply This occurs when to a % change in price there is no change in quantity supplied. Vertical i.e. parallel to y –axis. 2. 0 < Es < 1 Inelastic supply This occurs when there is a % change in price there is lesser change in quantity supplied. Upward sloping originating from x-axis. 3. Es = 1 Unitary elastic supply This occurs when to a % change in price there is equal change in quantity supplied. Upward sloping originating from origin. 4. 1 < Es < ∞ Elastic supply This occurs when to a % change in price there is more than proportionate change in quantity supplied. Upward sloping originating from y-axis. 5. Es = ∞ Perfectly elastic supply This occurs when there is infinite change in quantity supplied at a price. Horizontal i.e. parallel to x-axis.

19. Measurement of elasticity of supply PERCENTAGE METHOD GEOMETRIC METHOD

20. PERCENTAGE METHOD Elasticity of supply is measured by the formula: If the value of : Es > 1 → supply is elastic Es = 1 → supply is unitary elastic Es < 1 → supply is inelastic The value of Es ranges from zero to infinity. Es = Percentage Change in Quantity Supplied ______________________________ percentage Change in Price = ∆ Q P ________ . ________ ∆P Q

21. GEOMETRIC METHOD Any straight line supply curve passing through the origin has the value of elasticity equal to one. If any straight line supply curve goes through the quantity axis, it is inelastic. if a straight line supply curve goes through the price axis i.e. y-axis it is elastic If a straight line supply curve is parallel to x-axis and y-axis it is perfectly elastic and inelastic supply respectively .

22. Managerial Uses Of Elasticity