ENGINEERING ECONOMICS & FINANCIAL ACCOUNTING - LAW OF SUPPLY - FINAL YEAR CS/IT - SRI SAIRAM INSTITUTE OF TECHNOLOGY - DR.K.BARANIDHARAN

7/27/2019 ENGINEERING ECONOMICS & FINANCIAL ACCOUNTING - LAW OF SUPPLY - FINAL YEAR CS/IT - SRI SAIRAM INSTITUTE OF TECHNOLOGY - DR.K.BARANIDHARAN

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EngineeringEconomics &

Financial AccountingEe&fa

217 August 2013


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LAW OF SUPPLY


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Law of Supply

Law of Supply- refers to the relationship between price andthe quantity of a good or service that firms are willing toproduce. The higher the price of the product leads to moresupplies and more companies making the product.

Price

As price

increases

Supply

Quantity

supplied

increases

Price

As price

falls

Supply

Quantity

supplied

falls


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Faculty of B usin ess and Eco nom ics (FBE), The IIPM, New Delhi

SUPPLY

Quantity Supplied refers to theamount (quantity) of a good that

sellers are willing to make

available for sale at alternative

prices for a given period.


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Price

Law of Supply

The law of supply states that,

other things equal,

the quantity

supplied of a good

rises when theprice of the good

rises.


7/21Faculty of B usin ess and Eco nom ics (FBE), The IIPM, New Delhi

The Supply Schedule and the

Supply Curve

The supply schedule is a table

that shows the relationship

between theprice 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



Table 4-4: Bens Supply Schedule

53.00

42.50

32.00

21.50

11.00

00.50

00.00

Quantity ofcones Supplied

Price of Ice-cream Cone ($)



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: Bens Supply Curve


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Elasticity of supply

The degree of responsiveness of thequantity of a commodity applied for asmall change in its price.


=

= 1


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Types of elasticity

A)perfect elasticity or infinite elasticity ofsupply (Es= )

Any quantity can be supplied it a given priceand there is no need to increase the price

On the other hand the firm can even stop thesupply 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



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Perfectly elasticity or infiniteelasticity of supply


Quantity suppliedO

X

Y

p


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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 curveis a vertical line parallel to the y -axis



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PERFECTLY ELASTICITY OFSUPPLY


price

OX

Y

Quantity suppliedQ


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UNITY ELASTICITY ((Es = 1)

The percentagechange in quantitysupplied is equal to

the percentagechange in price



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Unit elasticity

Es = 1


price

OX

Y

Quantity supplied

S


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RELATIVELY ELASTIC ((Es 1)

The elasticity of supply isgreater than 1 the supply issaid to be elastic. If the priceincrease by 10% the supplyincrease by more than 10%

Conversely, if the price fallsby 10% the supply falls bymore than 10%



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Es

1


price

OX

Y

Quantity supplied


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RELATIVELY INELASTICITYSUPPLY (Es 1)

The % change inquantity supplied is

less than % change inprice. Supply is said

to be inelasticity.



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RELATIVELY INELASTIC SUPPLY

Es

1


price

OX

Y

Quantity supplied


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Dr.K.Baranidharan

THANK YOU

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ENGINEERING ECONOMICS & FINANCIAL ACCOUNTING - LAW OF SUPPLY - FINAL YEAR CS/IT - SRI SAIRAM INSTITUTE OF TECHNOLOGY - DR.K.BARANIDHARAN