Standard SSEMI2 a. Define the Law of Supply and the Law of Demand.
Law of Supply
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Transcript of Law of Supply
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LAW OF
SUPPLY
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SUPPLY
Willing to offer to the market at various prices during period of timeAble to offer to the market at various prices during period of time
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SUPPLY
What firm offer for sale, not necessarily to what they succeed in sellingIs a flow i.e. as per unit of time, per day, per week, or per year
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DEFINATIONS OF SUPPLY:
• Thomas:
The supply of good is the quantity offered for sale in a given market at a given time at various prices
• Samuelson:
Supply refers to the amount of a good that producer in a given market desire to sell, during a given time period at various prices, ceteris paribus
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DETERMINANTS OF SUPPLY:
Price of good
Price of related good
Price of the factors of production
State of technology
Government policy
Other factors
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1. Price of the good:
o Ceteris paribus i.e. other things being equal
o Relative price of the good o Quantity supplied
o This happens because goods are produced by the firm to gain profits
o Profits rises when price rises
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2. Price of related good:
Price of related good(y) Quantity supplied of other good(x)
Rise in price of the related goods make it more profitable for the firm to produce and sell
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• 3. price of factor of production:Changes in price of factor of production
Changes in relative profitability of different lines of production
Supplies of different commodities change
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• 4. government policy:
o Imposition of commodities taxes increase the cost of production
o Subsidies reduces the cost of production which increases firm’s supply
5. State of technology6. Other factorso Govt. industrial & foreign policieso Goals of the firmo Market structure, etc.
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LAW OF SUPPLY:1 DOOLEY:oLaw 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
2 Lipsey:oThe law of supply states that other things
being equal, the quantities of any commodity that firm will produce & offer for sale, is positively related to the commodities own price, rising when price rises & falling when price falls
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LAW OF SUPPLY:o There is a direct relationship between price &
quantity supplied:o Quantity supplied rises as price rises, other
things constanto Quantity supplied falls as price falls, other
things constant
o The law of supply is accounted for by 2 factors:o When price rises, firms substitutes production of
one good for anothero Assuming firm’s cost are constant, a higher
price means higher profits
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LAW OF SUPPLY:
Behaviour of supply depend upon:oPhenomenon considered
oDegrees of possible adjustment in supply
oTime taken into consideration i.e short run & long run
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SUPPLY SCHEDULE:
o Supply schedule is a series of quantities which a producer would like to sell per unit of time at different prices
o Two aspects of supply schedule:-
• Individual supply schedule• Market supply schedule
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INDIVIDUAL SUPPLY SCHEDULE:
Price (rs) (per kg)
Quantity supplied (kg)
1 10
2 30
3 50
4 70
5 80
It is defined as a table which shows quantities of a given commodity which an individual producer will sell at all possible prices at a given time
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MARKET SUPPLY SCHEDULE:
o It is defined as the quantities of a given commodity which all producers will sell at all possible prices at a given moment of time
o In a market there are many producers of a single commodity
oBy aggregating the individual supply, the market supply schedule is constructed
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o It indicates that when price of ‘x’ is RS 100 per unit, A’s supply is of 40 units and that of ‘B’ is of 50 units
o Thus the market supply is 90 unitso As the price increases, quantity
supplied increases
Price of commodity ‘x’ (in RS)
Supply by A
supply by B
MARKET SUPPLY (units)
100 40 50 40+50 = 90
200 60 70 60+70 = 130
300 65 80 65+80 = 145
400 80 100 80+100 = 180
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SUPPLY CURVE:
oA supply curve is a locus of points showing various price – quantity combinations of a seller
o It shows the direct relationship between price and quantity supplied
o It slopes upward to right
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EXCEPTION TO LAW OF SUPPLY:
1. Supply of labour:o If we take the supply of labour at very high
wages, we may find that the supply of labour has decreased instead of increasing
2. Agricultural products:o Since the production of agricultural products
cannot be increased beyond a certain limit, the supply cannot be increased beyond this limit even on increase in their prices
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• 3. Artistic goods:
• Supply of artistic goods cannot be increased or decreased easily
• 4. Goods of auction:• Supply of goods of auction is limited as such
cannot neither be increased nor decreased
• 5. Hope of change in the prices of commodities in near future:
• If the price of commodity is on rising pace, then the supply of such commodities decreases as producers and sellers will like to store this commodity & vice - versa
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EXPANSION AND CONTRACTION IN DEMAND:
EXPANSION• Qs price • Upward movement
along the supply curve
CONTRACTION• Qs price • Downward movement
along the supply curve
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INCREASE AND DECREASE IN SUPPLY:
INCREASE •Q supplied ( at all prices)due to change in other factors•Rightward shift
DECREASE •Q supplied ( at all prices) due to change in other factors•Leftward shift
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DEGREES OF PRICE ELASTICITY OF SUPPLY:
Perfectly elasticE =
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DETERMINANTS OF PRICE ELASTICITY OF SUPPLY:
1. NATURE OF COMMODITY:
PERISHABLE•Inelastic supply
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DETERMINANTS OF PRICE ELASTICITY OF SUPPLY:
• 2. TIME:
Very short period• Inelastic
Short period• Elastic
Long period• Highly elastic
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DETERMINANTS OF PRICE ELASTICITY OF SUPPLY:
• 3. PRODUCTION TECHNIQUE:
COMPLICATED• Inelastic supply
NOT COMPLICATED• Elastic supply