Question

Write short notes on the following:

i. Elasticity of supply.

ii. Market supply schedule.

iii. Change in supply.

iv. Percentage method.

v. Labour supply curve.

Answer 1

i. Elasticity of supply, or price elasticity of supply, measures the responsiveness of the quantity supplied of a commodity to the change in its price. It assists us in knowing the magnitude of the change in supply due to the change in its price.

Algebraically, it is calculated as:
$$\begin{gathered} E_s=\frac{\mathrm{Percentage}\mathrm{Change}\mathrm{in}\mathrm{Quantity}\mathrm{Supplied}}{\mathrm{Percentage}\mathrm{Change}\mathrm{in}\mathrm{Price}} \\ =\left(+\right)\frac{{\displaystyle \frac{∆Q}{Q_1}}\times 100}{{\displaystyle \frac{∆P}{P_1}}\times 100} \\ =\left(+\right)\frac{∆Q}{Q1}\times \frac{P_1}{∆P} \\ =\left(+\right)\frac{∆Q}{∆P}\times \frac{P_1}{Q_1} \end{gathered}$$

Where:

ΔQ represents change in the quantity supplied i.e. (Q₂−Q₁)
ΔP represents change in the price i.e. (P₂−P₁)
P₁ represents the initial price
P₂ represents the final price
Q₁ represents the initial quantity supplied
Q₂ represents the final quantity supplied

ii. It refers to the supply schedule of all the producers or firms in a market. It is a tabular representation of the sum total of quantities supplied by all the firms in the market at different price levels. It represents the supply schedule of a market as a whole.

Market Supply Schedule
Price (in Rs) A	Quantity Supplied by Firm 1 (f1) (in units) B	Quantity Supplied by Firm 2 (f2) (in units) C	Market Supply M =f1+f2 (in units) D=B +C
1	5	10	5 + 10 = 15
2	10	20	10 + 20 = 30
3	15	30	15 + 30 = 45
4	20	40	20 + 40 = 60
5	25	50	25 + 50 = 75
6	30	60	30 + 60 = 90

iii. Change in supply is caused due to the change in a variables other than the price of a good (i.e. the price of the good remains the same). These other factors can be technological advancements, change in the prices of inputs etc. Change in supply can be of two types namely, increase in supply and decrease in supply.
Increase in supply: There is an increase in supply due to the favourable changes in the determinants other than the price of the good. It is represented by a parallel rightward shift of the supply curve.



Decrease in supply: Decrease in supply refers to the fall in the supply, due to unfavourable changes in the determinants, other than price of a good (i.e. the price of the good remains same). It is represented by a parallel leftward shift of the supply curve.



iv. Under the percentage method, the price elasticity of supply is given by the ratio of percentage change in the quantity supplied and percentage change in the price of a commodity.
Algebraically, it can be expressed as:

$$\begin{gathered} E_s=\frac{\mathrm{Percentage}\mathrm{Change}\mathrm{in}\mathrm{Quantity}\mathrm{Supplied}}{\mathrm{Percentage}\mathrm{Change}\mathrm{in}\mathrm{Price}} \\ =\left(+\right)\frac{{\displaystyle \frac{∆Q}{Q_1}}\times 100}{{\displaystyle \frac{∆P}{P_1}}\times 100} \\ =\left(+\right)\frac{∆Q}{Q1}\times \frac{P_1}{∆P} \\ =\left(+\right)\frac{∆Q}{∆P}\times \frac{P_1}{Q_1} \end{gathered}$$

Where:

ΔQ represents change in the quantity supplied i.e. (Q₂−Q₁)
ΔP represents change in the price i.e. (P₂−P₁)
P₁ represents the initial price
P₂ represents the final price
Q₁ represents the initial quantity supplied
Q₂ represents the final quantity supplied

v. Labour supply curve represents the labour supplied at different wage rates. It is a backward bending curve. Initially, as the wage rate increases the worker prefers work to leisure. Thereby, the labour supply curve slopes upward. However, as the wage rate continues to rise, the beyond a point, the workers start preferring leisure to work. Accordingly, beyond this the labour supply curve bends backwards.