Question

Give reasons or explain:

i. Supply is directly related to price.

ii. Stock can exceed supply.

iii. When price rises, supply expands.

iv. The supply of agricultural commodity is relatively inelastic.

v. With a slight change in the price, if supply varies in a greater proportion then supply is said to be relatively elastic.

Answer 1

i. Other things remaining constant, the quantity supplied of a commodity is positively related to the price of the commodity. Higher prices implies higher profitability for the producers. Thus, at higher prices producers prefer to supply greater quantities of the commodity.

ii. Stock is the total amount of goods that are available with the seller for sale in the market at a given point of time. However, the sellers may or may not be willing to sell the entire available amount. Accordingly, the sellers can take only a part of the stock to sell in the market at the given prices. In other words, we can say that while stock is the total amount of goods available for sale, supply is the part of stock which the sellers are actually willing to sell in the market at the given price. Thus, stock can exceed supply.

iii. Supply of a good is positively related to the price of a commodity. That is, other things being constant, when the price of a good increases, its quantity supplied also increases. This is because higher prices implies higher profitability for the producers. Consequently, they prefer to increase the sales by increasing supply.

iv. The supply of agricultural commodities is subject to a high degree of uncertainty. For example, whatever be the price, the supply of wheat cannot be increased in the short run in the event of any natural calamity or crop failure. Thus, we can say that the supply of an agricultural commodity is relatively inelastic.

v. When the supply of a good is highly responsive to the changes in its price, the supply of that good is said to be relatively elastic. In other words, with a slight change in the price, if supply varies in a greater proportion, the supply is said to be relatively elastic. In this case, the percentage change in the supply is greater than the percentage change in the price. Hence, the value of price elasticity of supply is greater than one i.e. E_s > 1.