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Revision: Microeconomic Theory >> Supply: Law of Supply and Price Elasticity of Supply Economics ISC (Commerce) Class 12 CISCE

Definitions [7]

Define the term supply.

Supply means the quantity of a commodity offered for sale at a particular price, during a given period of time by the producer.

The term ‘supply’ refers to the quantity of a good that a firm is willing to supply at a particular price during a period of time.

Definition: Law of Supply

"The law of supply states that the higher the price, the greater the quantity supplied or the lower the price, the smaller the quantity supplied." – Dooley

Define a relatively inelastic supply.

Supply of a commodity will be said to be inelastic if the percentage change in quantity supplied is less than the percentage change in price.

Define a relatively elastic supply.

Supply of a commodity will be said to be elastic if the percentage change in quantity supplied exceeds the percentage change in price (E_s > 1).

Define price elasticity of supply.

Price elasticity of supply refers to the degree of responsiveness of supply of a commodity in response to a change in the price of that commodity.

Define elasticity of supply.

Price elasticity of supply refers to the degree of responsiveness of supply of a commodity in response to a change in the price of that commodity.

Definition: Elasticity of Supply

"Elasticity of supply is defined as the percentage change in quantity supplied by percentage change in price." – Prof. Bilas
"Elasticity of supply is the ratio of percentage change in 'quantity supplied over the percentage change in price." – Lipsey

Formulae [2]

Supply Function

$S = f (P, I, T, N, G, E, R, F, Tr)$

Where:

: Price of the commodity
: Input prices
: Technology
: Number of sellers
: Government policy
: Expectations
$R$ : Related goods prices
: Natural factors
: Transport/communication

Formula: Elasticity of Supply

\[e_s=\frac{\text{Proportionate Change in Quantity Supplied}}{\text{Proportionate Change in Price}}\]

Where:

: Elasticity of supply
: Change in quantity supplied
: Change in price
: Original quantity supplied
: Original price

Theorems and Laws [3]

State the law of supply.

The law of supply states that other factors being equal, the quantity of a good supplied increases with an increase in the price level and decreases with a decrease in the price level of a good.

Law of supply states the direct relationship between price and quantity supplied, keeping other factors constant.

The law of supply states that other factors being equal, the quantity of a good supplied increases with an increase in the price level and decreases with a decrease in the price level of a good.

The supply schedule below shows the positive relationship between price and quantity supplied.

Price (in Rs)	Quantity Supplied
5	100
10	200
15	300

SS is the supply curve sloping upwards. When the price increases from Rs. 5 to Rs. 15, the quantity supplied also increases from 100 units to 300 units.

Explain the law of supply.

The law of supply shows a direct relationship between the price of a good and the quantity supplied. As the price rises, the quantity supplied also increases. This scenario is represented by an upward-sloping supply curve. This happens mainly due to two reasons:

Profit Motivation: When the price of a product goes up, the chance of earning more profit also increases (assuming other factors remain the same). This encourages producers to supply more of that product.
Rising Production Costs: As production increases, the cost of making each additional unit (marginal cost) also rises. So, producers are willing to produce and supply more only if the price is high enough to cover these extra costs.

Statement of the Law of Supply

“Other things being constant, the higher the price of a commodity, more is the quantity supplied; and lower the price of a commodity, less is the quantity supplied.”

In simple words: When the price rises, supply rises; when the price falls, supply falls.
There is a direct relationship between price and quantity supplied.

Symbolically:

Where:

S = Supply
x = Commodity
f = Function
$=$ Price of the commodity

Key Points

Key Points: Concept of Supply

Supply is about "ready to sell", linked to both price and time.
Supply ≤ Stock.
Stock is what’s on hand; supply is what’s for sale.

Key Points: Supply Schedule

A supply schedule shows the relationship between price and quantity supplied in tabular form.
Price and supply move in the same direction (direct relationship).
Supply curve slopes upward from left to right.

Key Points: Individual Supply Schedule

Shows price–quantity relationship for a single producer.
Higher price → higher supply, lower price → lower supply.
Individual supply curve slopes upward, showing direct relationship.

Key Points: Market Supply Schedule

Shows total quantity supplied by all producers at different prices.
Market supply = sum of individual supplies (A + B + C).
Higher price → higher market supply.
Market supply curve slopes upward, showing direct relationship.

Key Points: Law of Supply

Law of supply: The Higher the price, higher the supply; lower price, lower supply (if all else stays the same).
Exceptions: rare items, short periods, perishable goods, some labor markets.
Supply is always shown using a schedule (table) and a curve (graph).
Supply schedule shows price and quantity supplied in tabular form
Assumes other factors constant
Types: Individual and Market
Individual supply schedule shows supply of one producer
Market supply schedule shows total supply of all producers
Market supply = sum of individual supplies
Law of supply: Higher price → higher quantity supplied
Supply curve is graphical form of supply schedule
Price on Y-axis, quantity on X-axis
Supply curve slopes upward
Types: Individual supply curve and Market supply curve