Total Output : Output is produced through the process of production. Thus, Total Output can be defined as "The sum total of the quantity of the commodity produced at a given period of time in the economy." Therefore, Total Output is total amount of commodities produced during a period of time with the help of all factors of production employed by the firm.
Stock and Supply : The term 'Stock' and 'Supply' are different but inter-related. In economics, these two terms have different meaning.
Stock : Stock is the source of supply, without stock supply is not possible. Stock is the total quantity of commodity available for sale, with a seller at a particular point of time. It is potential supply, by increasing production, stock can be increased. Generally, stock is more than supply because total stock consists of current stock and previous stock.
In case of durable goods, the entire stock of goods may not be offered for sale. If its market price is low, a part of it is stored. But in case of perishable goods like vegetables, fish, etc., stock maybe equal to supply because they cannot be stored for a longer period of time. Hence, stock may be equal or more. than supply. Thus stock can exceed supply, but supply cannot exceed the stock.
Supply: Supply is a relative term. It is always expressed in relation to price, time and quantity.
Definition of Supply :
According to Paul Samuelson, supply refers to "The relation between market prices and the amount of goods that producers are willing to supply."
Supply is that part of stock, which is actually brought into the market for sale at, a particular time and price. Supply is the flow out of stock. So stock is the source of supply.
Supply refers to quantity of a commodity that a seller (firm) is willing and able to offer for sale at a particular price, during a certain period of time. For example, suppose a farmer produces 2000 kgs. of rice. This is his total stock. At Rs. 30 per kg., if he offers 800 kg. rice for sale at a given period of time. That 800 kg. rice is his actual supply.
From the above explanation, it is clear that concept of supply highlights four essential elements :
i) Quantity of commodity
ii) Willingness to sell
iii) Price of the commodity
iv) Period of time.
4.3 Distinction between Stock and Supply
1) Stock refers to the entire quantity of commodity which exists with the seller. It is potential supply.
Supply refers to the quantity of a commodity offered for sale at a given price and at a point of time.
2) Stock depends upon production, while supply depends on stock and price.
3) Stock is a static concept, whereas supply is a flow concept.
4) Stock exceeds supply. For perishable goods the stock and supply can be same. However, supply cannot exceed stock.
4.4 Supply Schedule Individual and Market Supply Schedule
Supply schedule is a table showing different quantities of commodity being supplied at various prices, during a given period of time. There is a direct relationship between price and quantity supplied.
1. Individual Supply Schedule : Individual Supply schedule refers to a table which shows various quantities of a commodity offered by a single seller for sale at different prices during a given period of time. For example -
Table No. 4.1 – Individual Supply Schedule
Price (Rs.) (per Unit) | Quantity of X Supplied (Units) |
1 | 10 |
2 | 20 |
3 | 30 |
4 | 40 |
5 | 50 |
From the Supply schedule it is clear that the quantity supplied of commodity X increases in price. The seller is willing to sell 10 units of commodity X at a price of Rs. 1, when the price rises to Rs. 5 supply increases to 50 units.
2. Market Supply Schedule :- Market Supply schedule refers to a table which shows various quantities of a commodity, offered for sale by all the sellers in the market at different prices, during a given period of time. It is obtained by horizontal summation of supply of all individuals at various prices. It is assumed that market consists of three sellers (A, B and C). It can be explained with the help of a table given below:
Table No. 4.1 – Market Supply Schedule
Price (Rs.) (per unit) | Supply of Commodity X (Unit) | Market Supply of (A+B+C) (Unit) | ||
Seller A | Seller B | Seller C | ||
1 | 10 | 20 | 30 | 60 |
2 | 20 | 30 | 40 | 90 |
3 | 30 | 40 | 50 | 120 |
4 | 40 | 50 | 60 | 150 |
5 | 50 | 60 | 70 | 180 |
As seen in the above table, market supply is obtained by adding the supply of sellers A, B and C at different prices. At a price of Rs. 5 market supply increases to 180 units and at a price Rs. 1 market supply is 60 units.
4.5 Determinants of Market Supply
The important factors that determine the market supply are as follows :
1. Price of a commodity : Price is an important factor influencing the supply of a commodity. More is supplied at a higher price and less is supplied at a lower price.
2. Cost of Production : If the factor price increases the cost of production also increases. Thus, supply decreases.
3. State of Technology : Technological improvements reduce the cost of production, which leads to an increase in production and supply.
4. Government Policy : Government Policies like taxation, subsidies, industrial policies, etc., may encourage or discourage production and supply, depending upon government policy measures.
5. Nature of Market : In a competitive market, the supply of goods would be more due to large number of sellers. But in monopoly, i.e., single seller market, supply would be less.
6. Prices of other Goods: An increase in the prices of other goods makes them more profitable in comparison to a given commodity. As a result, the firm shifts its limited resources from production of a given commodity to the production of other goods. For example, an increase in the price of wheat will induce the farmer to use his land for the cultivation of wheat instead of rice. So supply of rice decreases.
7. Infrastructure Facility : Infrastructure in the form of transport, communication, power, etc., influence the production process as well as supply. Shortage of these facilities decreases the supply.
8. Exports and Imports : Exports reduce the supply of goods within the country. Whereas imports increase the supply of goods.
9. Future Expectations : If the prices are expected to rise in the near future, the producer may with hold the stock. This will reduce the supply.
10. Natural Conditions : The supply of agricultural products depends on the natural conditions. For example, a good monsoon and favourable climatic condition will produce a good harvest, so the supply of agricultural products will increase.
4.6 Law of Supply : Introduction
The Law of Supply is introduced by Dr. Alfred Marshall in his book 'Principles of Economics', which was published in 1890. The law explains the functional relationship between price and quantity supplied.
Statement of the Law : According to Dr. Alfred Marshall, "Other things being constant the higher the price of the commodity, greater is the quantity supplied and lower the price of the commodity, smaller is the quantity supplied."
The law states that other things remaining the same, the seller will supply more quantity of goods at a higher price and less quantity of goods at a lower price. Law of supply can be better understood with the help of following schedule and diagram:
Table No. 4.3 – Supply Schedule
Price (Rs.) (per Unit) | Quantity Supplied of Commodity X (in Units) |
10 | 100 |
20 | 200 |
30 | 300 |
40 | 400 |
50 | 500 |
Supply schedule clearly shows that more units of the commodity are being offered for sale as the price of the commodity increases.
Supply Curve
Fig. No. 4.1
In the above given diagram, quantity supplied is shown on the X axis and price on the Y axis. Supply curve SS slopes upward from left to night, indicating direct relationship between price and quantity supplied.
Assumptions of the Law of Supply :
The law of supply is conditional. Since we assume that price alone changes and all other factors determining supply remain constant. These assumptions are, as follows:
1) Cost of Production is unchanged: It is assumed that there is no change in the cost of production. A change in cost will change profits of the seller and therefore supply at the same price.
2) No change in Technique of Production: It is assumed that there is no change in the method or technique of production. Improved technology may increase supply at, the, same price.
3) Government's Policies remain unchanged: It is also assumed that Government policies like taxation policy, trade policy, etc., remain unchanged.
4) No change in transport cost: It is assumed that there is no change in the condition of transport facilities and transport costs. e.g. Better transport facility increases supply at the, same price.
5) No Future Expectations: The law also assumes that the sellers do not expect future changes in the price of the product.
6) No change in Weather Conditions: It is assumed that there is no change in the weather conditions. There are no natural calamities like floods, earthquakes which may decrease supply.
7) Prices of other goods remain constant: The prices. of other goods are assumed to remain constant. If they change, the law of supply may not hold true because producer may transfer resources to other products.
8) Constant scale of production: It is assumed that the scale of production remains constant during the given period of time.
Exceptions to the Law of Supply :
There are some exceptional cases, where supply tends to fall with the rise in price or tends to rise with the fall in price. Such exceptions are:
1) Labour Supply : In case of labour, as the wage rate rises, the supply of labour (number of curve slopes upward, but the supply of labour decreases, with a further rise in the wage rate. Thereafter, supply curve of labour slopes backwards. This is because the worker would prefer leisure to work after receiving higher amount of wages. Thus after a certain point when wage rate rises the labour supply tends to fall.
I can be explained with help of backward bending supply curve as follows -
Supply of labour
Fig. No. 4.2
In the above diagram; supply of labour is shown on the X axis and wage rate on the Y axis. In the above diagram the curve SAS1 represents a backward bending supply curve. The supply of labour rises with every rise in the wage rate up to OW1. But thereafter, as the wage rate rises from W1 to W2 the supply of labour falls from OM1 to OM2. So supply curve slopes backward from A to S1. The backward bending supply curve shows that as wage rate rises from OW1 to OW2. The supply of labour falls, from OM1 to OM2 thus there is a backward slope in the supply curve.
2) Saving: Normally, when the rate of interest rises saving increases. But some people want to have fixed regular income, by the way of interest. They may save less at a higher rate of interest and saving tend to rise as the rate of interest falls. For example, suppose, a person is interested in earning a fixed income Rs. 200. Then he has to save Rs. 5000, when the rate of interest is 4% but with an increase in the rate of interest from 4% to 5%, he will reduce savings from Rs. 5000 to Rs. 4000. This is an exception to the law of supply.
3) Need for Cash: If a seller is in urgent need for cash, he will supply a large amount of a commodity even at lower price.
4) Agricultural Goods: The law of supply does not apply to agricultural goods as they are produced once a year and their production depends on climatic condition. Due to unforeseen changes in weather, if the agricultural production is low, then their supply cannot be increased even at higher price.
5) Future expectations about price: If a seller expects a fall in price in the near future he will be willing to sell more, even at a lower price.
6) Rare Articles: Antiques, artistic articles are exceptions to the law of supply because a change in price cannot change their supply.
4.7 Increase and Decrease in Supply (Change in Supply)
When supply of commodity changes due to change in other factors at the same price; then it is known as 'Change in Supply'. There are two types of changes in supply. They are -
i) Increase in Supply
ii) Decrease in Supply
i) Increase in Supply : Increase in Supply refers to rise in the supply of given commodity, due to favourable changes in other factors such as decrease m the prices of. inputs, decrease in tax, technological upgradation, etc. price remaining constant. The supply curve shifts to the right of the original supply curve. It can be explained with the help of following diagram.
Increase in Supply
Fig. No. 4.3
In the above diagram, quantity supplied is shown on the X axis and price on the Y axis. Supply rises from 100 to 200 units at the same price of Rs. 10, resulting in a rightward shift of the supply curve from SS to S1 S1. It is known as Increase in Supply.
ii) Decrease in Supply : Decrease in Supply refers to a fall in the supply of a given commodity due to unfavourable changes in other factors such as increase in the prices of inputs. increase in taxes, technological degradation, etc. price remaining the same. The supply curve shifts to the left hand side of the original supply curve as shown in the diagram.
Decease in Supoply
Fig. No. 4.4
In above diagram, quantity supplied is shown on the X axis and price on the Y axis. Supply falls from 100 units to 50 units at the same price of Rs. 10. It results into a leftward shift of the supply curve from SS to S1 S1. It is known as Decrease in Supply.
4.8 Extension and Contraction of Supply (Variations in Supply)
When quantity supplied of a commodity changes due to change in its price, other factors remaining constant, it is known as Variation in Supply. There are two types of Variation in Supply. They are:
i) Extension in Supply or Expansion of Supply and
ii) Contraction of Supply
i) Extension in Supply : Extension of Supply refers to a rise in the quantity supplied due to an increase in price of a commodity, other factors remaining constant. Extension of supply leads to an upward movement along the same supply curve due to rise in price. It can be better understood from the given diagram.
Extension of Supply
Fig. No. 4.5
In the above diagram, quantity supplied is shown on the X axis and price on the Y axis. Quantity supplied rises from 100 units to 200 units. With an increase in price from Rs. 10 to Rs. 20, resulting in an upward movement from M to N along the same supply curve SS. It is known as Extension of Supply.
ii) Contraction of Supply : Contraction of Supply refers to a fall in the quantity supplied, due to fall in price of the commodity, other factors remaining constant. In case of Contraction of supply, there is a downward movement along the same supply curve as seen in the given diagram.
Contraction of Supply
Fig. No. 4.6
In the above diagram, quantity supplied is shown on the X axis and price on the Y axis. Quantity supplied falls from 200 units to 100 units with a fall in price from Rs. 20 to Rs. 10, resulting in a downward movement from J to M, along the same supply curve SS. It is known as Contraction of Supply.
4.9 Concept of Elasticity of Supply and Types of Elasticity of Supply
The concept of Price Elasticity of Supply explains the quantitative change in supply of a commodity, due to given change in the price of the commodity.
Elasticity of Supply may be defined as a ratio of the percentage change or the proportionate change in the quantity supplied to the percentage or proportionate change in the price. In symbolic terms,
Types of Price Elasticity of Supply :
There are five types of Price Elasticity of Supply.
i) Perfectly Elastic Supply : With a negligible change in price there is infinite change in quantity supplied, and if there is slight fall in price supply become zero. Then it is said to be Perfectly Elastic Supply. It can be explained with the help of diagram.
Perfectly Elastic Supply
Fig. No. 4.7
In the above diagram, quantity supplied is shown on the X axis and price on the Y axis. Thus elasticity of supply is infinite. Es =a (infinite). 'SS' is a supply curve is a horizontal straight line parallel to X axis.
ii) Perfectly Inelastic Supply : When change in price does not bring about any change in quantity supplied, it is known as perfectly Inelastic Supply.
In this case elasticity of supply is zero. It can be shown with the help of following diagram.
Perfectly Inelastic Supply
Fig. No. 4.8
In the above diagram, quantity supplied is shown on the X axis and price on the Y axis. Supply curves SS is a vertical straight line parallel to the Y axis. It shows quantity supplied remains the same even, if the price increases from P to P2 or decrease from P to P1 Thus elasticity of supply is zero Es = 0.
iii) Unitary Elastic Supply : When a change in price brings about ,a proportionate change in quantity- supplied, then it is unitary elastic Supply. In this case Es = l, it can be shown as follows -
Unitary Elastic Supply
Fig. No. 4.9
In the above diagram, quantity supplied is shown on the X axis and price on the Y axis. Quantity supplied rises from OQ to OQ1with a rise in price from OP to OP1. Change in quantity supplied is proportionately equal to change in price. When the, supply, curve bisects the angle made by the X axis and, Y axis elasticity of supply is equal to one.
iv) More Elastic Supply/Relatively Elastic Supply: When percentage change in quantity supplied is more than the percentage change in price, then it is more elastic supply. Here, the price elasticity of supply is more than one (Es > 1). So supply curve is flatter:
Relatively Elastic Supply
Fig. No. 4.10
In the above diagram, quantity supplied is shown on the X axis and price on the X axis. Due to a small change in price from OP to OP1, there is a greater change the quantity supplied from OQ to OQ1. Here elasticity of supply is more than one.
v) Less Elastic Supply/Relatively Inelastic Supply : When percentage change in quantity supplied is less than the percentage change in price, then it is less elastic supply. In this case elasticity. of supply is less than one. So supply curve is steeper.
Relatively Inelastic Supply
Fig. No. 4.11
In the above diagram, quantity supplied is shown on the X axis and price on the Y axis. SS is the less. elastic supply curve, which indicates that a greater change in price from OP to OP1 bring about less than proportional change in the quantity supplied from OQ to OQ1. Here the Price Elasticity of Supply is less than one.
4.10 Measurement of Elasticity of Supply :
Price elasticity of supply can be measured by the following methods.
1. Percentage Method: This method is also known as 'Ratio Method'. According to this method, elasticity is measured. as a ratio of percentage change in the quantity supplied to percentage change in the price.
Ex : Suppose 100 kg Potatoes are supplied, at a price of Rs. 8 and at price of Rs. 10, the supply expands to 125 kg of Potatoes.
If answer is one then it is unitary elastic supply, if answer is more than one, it is more elastic supply, and if answer is less than one, it is inelastic supply.
Elasticity of Supply is always positive because of the direct relationship between price and quantity supplied.
2. Geometric Method : According to geometric method, elasticity, is measured at a given point on the supply curve. This method is also known as point method.
To measure the price elasticity of supply at a given point on the given supply curve, a tangent is drawn touching supply curve at that point, which meets the X-axis at a certain point. Then a perpendicular is drawn from point 'A'.
Let us now discuss the three different cases of Geometric Method:
i) More Elastic Supply : The tangent NN is drawn touching supply curve SS at point A. This tangent is extended to meet X axis at point N shown in the diagram. Hence Es > 1.
In the above given diagram, quantity supplied shown on X axis and price on the Y axis. At point A the tangent is extended beyond the Y axis, so that it meets the extended X axis at point N now at point A Elasticity of Supply is
Since NQ > OQ so Es > 1.
ii) Unitary Elastic Supply : The tangent NN to the supply curve SS passes through the point of origin. Hence Es = 1
Fig. No. 4.13
Here NQ = OQ
Hence, the supply is Unitary Elastic.
iii) Less Elastic Supply: If the tangent NN meets the X axis before the origin at point N then the supply is inelastic.
Fig. No. 4.14
AS seen the diagram
Here NQ < OQ, so Es < 1.
4.11 Determinants of Elasticity of Supply :
1. Nature of Commodity: By Nature, commodities are generally classified as perishable goods and durable goods. In the case of perishable commodities like vegetables, fruits, etc., supply is inelastic. Whereas in the case of durable goods like Furniture, T.V, etc., supply is elastic.
2. Time. Period: In the short run, supply is relatively inelastic, but in the long run supply is elastic.
3. Technique of Production: When advanced technology is adopted for production, the supply of a product tends to be more elastic on the other hand, the supply remains less elastic, if backward technology is adopted.
4. Cost of Production: If cost of production is more, supply will be inelastic. However, if the cost of production is less, supply will be elastic.
5. Natural Factors: The commodity whose production depends on natural factors, such as climatic conditions etc. the supply will be inelastic. For example, agricultural products.
6. Availability of Factors of Production: If raw material and factor of production are easily available, then supply will be elastic. However, if the factors of production are scarce, supply is inelastic.
7. Scale of Production: If goods are produced on a small-scale, their supply would be relatively inelastic. However, if goods are produced on a large-scale, their supply would be elastic.
8. Mobility of Factors: In those industries where there is a high degree of mobility of factors of production, supply will be more elastic.
4.12 Concepts of Cost : Total Cost Average Cost, Marginal Cost
Cost: When an entrepreneur undertakes an act of production he has to use various inputs like raw material, labour, capital, etc. He has to make payments for such inputs. The expenditure incurred on these inputs is known as the cost of production. Cost of production increases with an increase in output.
1. Total Cost: Total Cost (TC) is the total expenditure incurred by a firm on the factors of production required for the production of goods and services. Total cost is the sum of total fixed cost (TFC) and Total Variable cost (TVC) at various levels of output: Thus,
TC = TFC + TVC
TFC = Cost which is incurred on Axed factor of production like land.
TVC = Cost which is incurred on variable factors like labour, raw material, etc.
2. Average Cost: Average cost refers to total cost of production per unit. It is calculated by dividing TC, by total output.
Where,
AC = Average Cost
TC = Total Cost
TQ = Total Quantity of output
Suppose the total cost of production of 2 units of commodity is Rs. 80, than the Average cost is
3. Marginal Cost: Marginal cost is the net addition made to total cost by producing one more unit of output. If TC of producing 2 units is t 200 and TC of producing 3 units is Rs. 240 Then,
MCn = TCn - TCn-1
= Rs. 240 – Rs. 200
= Rs. 40
Where,
n = Number of units produced
MCn = Marginal Cost of the nt'' unit
TCn = Total Cost of n unit
TCn-1 = Total Cost of (n-1) units OR
Where,
DTC = Change in total cost
DTQ = Change in total quantity of output
4.13 Concept of Revenue : Total Revenue, Average Revenue, Marginal Revenue
Revenue: Revenue refers to the amount received by a firm from the sale of a given quantity of a commodity in, the. market at various prices.
Revenue = Quantity x Price
The concept of -revenue can be analysed as Total Revenue, Average Revenue & Marginal Revenue
1. Total Revenue (TR): Total Revenue refers to total receipts from the sale of given quantity of a commodity. It is the total income of a firm. Thus, Total Revenue = Total Quantity x Price
For example, if a firm sells 15 tables at a price of Rs. 200 per table, then the total revenue will be
Total Revenue = 15 Tables x Rs. 200
= Rs. 3000
2. Average Revenue (AR): Average Revenue refers to revenue per unit of output sold. It is obtained by dividing the total revenue by the number of units sold.
For example, if total revenue from the sale of 15 tables is T 3000 then average revenue will be
3. Marginal Revenue (MR): Marginal Revenue is the net addition made to total revenue by selling an extra unit of the commodity. For example, if the total revenue from the sale of 20 tables is Rs. 4000 and that from sale of 21st tables is Rs. 4180, then MR or 21st table will be
MRn = TRn – TR (n-1)
= 180
Q.1 A) Fill in the blanks with appropriate word given in the brackets :