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