The Meaning of Supply
As demand is defined as an agenda of the volume of commodity that will be bought at several prices, likewise the supply denotes to the agenda of the volume of a commodity that the firms are able and willing to offer for sale at several rates.
The volume of commodities the industries are capable to manufacture is based on the resource accessible to them and the technology they apply for manufacturing a product.
The volume of a product the industries will be willing to offer to sale is based on the profits they anticipate to make on manufacturing and selling the product. Profits in turn are based on the rate of the product on the one side and unit cost of manufacturing on the other.
Elasticity of Supply
The concept of elasticity like the elasticity of demand dwells a significant place in price thesis. The elasticity of supply is the degree of responsiveness of supply to variations in price of a commodity. More accurately the elasticity of supply can be defined as a percentage change in volume supplied of a commodity in response to a provided percentage variation in price of the commodity. Thus,
In metamorphic terms, we can inscribe:
Es = Δq + Δp = Δq * Δp
q p q Δp
= Δq * p
Δp q
For a precise gauge of elasticity of supply midpoint method, as described in crate of elasticity of demand, must be used. Using midpoint formula, elasticity of supply can be measured as
Es = q2 – q1 + p2 – p1
q1
+ q2 p1
+ p2
2 2
Where q2 – q1 = Δq and p2 – p1 = Δp
Thus,
Es = Δq * p1
+ p2
q1
+ q2 Δp
= Δq * p1
+ p2
Δp q1
+ q2
The elasticity of supply is based on the ease with which the productivity of an identity can be enlarged and the variation in marginal cost of manufacture. As there is larger scope for enhancement in productivity in the long run than in the short run, the supply of a commodity is more elastic in the long run than in the short run.
Measurement of Elasticity of Supply at a Point on the Supply Curve
The elasticity of supply at a point on the supply curve can be easily weighed by a formula. We shall obtain this formula below.
In the below diagram supply curve S1S is provided and elasticity of supply at Point A is necessary to be weighed. At point OP the volume supplied is OQ. With the hike in price from OP to OP’ the volume supplied enhances from OQ to OQ’. Enlarge supply curve S1S downward so that it meets X-Axis at point T.
Then, elasticity of supply at Point A = Δq / Δp
q p
= Δq * p
p q
A glance at the below diagram exposes that Δq = QQ’, Δp = PP’. Thus, writing QQ’ for Δq, PP’ for Δp, we have elasticity of supply parities to:-
Es = Δq p = QQ’ OP
Δp
* q PP’ * OQ
It will be further seen from the below diagram that QQ’ = AC, PP’ = BC and OP = QA. Thus, substituting AC for QQ’, BC for PP’ and QA for OP we have
Es at point A = Δq p = QQ’ OP = AC QA ….
(1)
Δp
* q PP’ *
OQ BC
* OQ
Now, in triangles ACB and TQA
∟ACB = ∟TQA
Right angles
∟BAC = ∟ATQ
Corresponding angles
∟ABC = ∟TAQ
Corresponding angles
Thus, triangles ABC and TAQ are likely.
Therefore, AC = TQ
BC QA
Substituting TQ for AC in (1) above, we have the following
QA BC
Es
at A = TQ QA
QA
* OQ
= TQ
OQ
Therefore, we can gauge the value of elasticity of supply
from dividing TQ by OQ. As in the diagram, TQ is greater than OQ, supply elasticity TQ will
be greater than 1.
OQ
In the subsequent diagram curve when extended meets the X axis
to the right of the point of origin so that TQ is smaller than OQ. Thus, in the upcoming
diagram of supply at point A, which is equal to TQ is less than 1. In the second
below diagram,
OQ
Supply curve S1S when enlarged meets X axis precisely at the point of origin so that TQ is equal to OQ. Thus, the second bottom diagram elasticity of supply at point A will be equal to unity.
Supply Function and Elasticity of Supply
Let us now describe the price elasticity of supply using the supply function for a product. The linear supply function for a product is of the following type:
V = m
+ nr
Where V is the volume supplied of a product. Rate of the product is r, and m and n
are invariables. The invariable co-efficient n denotes the incline of the supply function
and indicates how much volume supplied varies supplied of a product enhances as its
rates enhances.
Now, elasticity of supply is
Es = ΔV R
ΔR
* V
Substituting n for ΔV / ΔR, we have Es = n. R/V
Illustration 73
Rate or Price = $90 per unit of product, Supply function 360 is the invariable intercept term m and 36 computes incline of the function (n) and parities to ΔV / ΔR. Determine the elasticity of supply. Thus the function is read as V = 360 + 36R
Solution
In order to procure elasticity of supply at price of $90, we first derive the volume supplied at this price. Thus, substituting $90 for R in the supply function we obtain,
V = 360 + 90*36 = 3600
Now, as determined above, elasticity of supply is
Es = n. R
V
= 36
* 90 = 0.9
3600
Which means 1 percent enhancement in rate will tend to 0.9 percent enhancement in volume supplied.
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- Concept of Cost
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- Establishment of Cost Function Analysis
- Establishment of Short Run Cost Function
- Estimation of Returns To Scale
- Isoquants, Equal Product Curves
- Linearity Assumptions
- Linearity Assumptions and Choice of Product and Process
- Long Run average Cost Curve
- Optimum Input Combination
- Production Function with Two Variable Inputs
- Short Run Cost Function
- Survival Technique
- Theory of Production - Returns to One Variable Factor
