Law of Supply and Elasticity of Supply

Supply is a fundamental economic concept that describes the total amount of a specific good or service that is available to consumers. It can relate to the amount available at a specific price or the amount available across a range of prices if displayed on a graph. This relates closely to the demand for a good or service at a specific price; all else being equal, the supply provided by producers will rise if the price rises because all firms look to maximize profits.

Supply-schedule:

It is a table that shows the relationship between the price of a good and the quantity supplied. Under the assumption of perfect competition,it is determined by marginal cost. That is, firms will produce additional output while the cost of producing an extra unit of output is less than the price they would receive.

A hike in the cost of raw goods would decrease supply, shifting costs up, while a discount would increase supply, shifting costs down and hurting producers as producer surplus decreases.

Price per K.g coffee Quantity supplied
46 40,000 Kgs
45 36,000 Kgs
44 20,000 Kgs
43 8,000 Kgs

Law of Supply:

It states:”Other things being equal, the supply of commodity extends with a rise in price and contracts with a fall in price”. There are some exceptions to this law.They are:

1. Expectation of a fall in price: If the firms anticipate that the price of the product will fall in future, they would be anxious to dispose of the present stock even at a price lower than the current market price.

2. Sellers need for cash: If a seller is hard pressed for cash,he may lower his price below the market price and dispose of his stock.

3. When leaving the industry: If an entrepreneur wants to leave the industry,he may charge a price below his average cost of production. The seller may be prepared to sell at a lower price.

4. Agricultural output: The supply of agriculture commodities is dependent more on natural and seasonal factors. In a particular season, their supply may go down even when the price has gone up.

Elasticity of Supply:

Elasticity of supply is a measure of relative change in the quantity supplied due to relative change in the price,on a given supply curve.

elasticity of supply

There are three extreme cases of Price Elasticity Supply.

  1. Perfectly elastic, where supply is infinite at any one price.
  2. Perfectly inelastic, where only one quantity can be supplied.
  3. Unit elasticity, which graphically is shown as a linear supply curve coming from the origin.

PES-graphs