Dr.K.BaranidharanPresent by…
Engineering Economics &
Financial Accounting
Ee&fa2April 12, 2023
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
Faculty of Business and Economics (FBE), The IIPM, New Delhi
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.
• 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.
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”
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: Ben’s Supply Schedule
53.00
42.50
32.00
21.50
11.00
00.50
00.00
Quantity of cones Supplied
Price of Ice-cream Cone ($)
Faculty of Business and Economics (FBE), The IIPM, New Delhi
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
6 8 10 120 2
1.50
1.00
1
2.00
3 4
$3.00
2.50
5
0.50
Figure 4-5: Ben’s Supply Curve
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.
• The degree of responsiveness of the quantity of a commodity applied for a small change in its price.
𝐸𝑆=𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 h𝑐 𝑎𝑛𝑔𝑒𝑖𝑛 h𝑡 𝑒𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦 𝑋
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 h𝑐 𝑎𝑛𝑔𝑒 𝑖𝑛 h𝑡 𝑒𝑝𝑟𝑖𝑐𝑒𝑜𝑓 𝑐𝑜𝑚𝑚𝑑𝑑𝑖𝑡𝑦 𝑋
𝐸 𝑠=𝑄𝑃 1𝐏𝐐𝟏
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
• 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
Quantity suppliedO
X
Y
p
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
• 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
price
OX
Y
Quantity suppliedQ
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
•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» Es = 1
price
OX
Y
Quantity supplied
S
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%
• 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• Es ► 1
price
OX
Y
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.
•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• Es ◄ 1
price
OX
Y
Quantity supplied
Dr.K.BaranidharanTHANK YOU