Livestock Economics, Marketing and Business Management

LAW OF SUPPLY

• Other things remaining constant (ceteris paribus), higher the price of a commodity, the larger will be the quantity supplied and lower the price the smaller will be the quantity supplied.
• In mathematical terms supply is an increasing function of price.

Determinants of supply

• Price of the commodity – when price of a commodity increases, its supply also increases.
• Price of a related commodity – When price of a good increases , supply of its substitute declines e.g. mutton and chicken.
• Cost of inputs of production – When cost of raw materials increases, supply decreases.
• State of technology – Improvement in technology lower the cost of production and increases the supply.
• Factors outside the economic sphere like flood, drought, fire etc.
• Tax and subsidy – Higher taxation will decrease the supply and granting subsidies will raise the supply.

Elasticity of supply (Click to view graph)

• It measures the rate at which the quantity supplied changes due to changes in price.

• Suppose the price of an egg rises from Rs. 1.00 to Rs. 2 and as a result the supply increases from 10 to 30 eggs.

• For 1 percent increase in price, there is 4 per cent increase (change) in quantity supplied.

Different types of elasticity of supply

• Perfectly inelastic - E_sp = 0
• Inelastic - E_sp<1
• Unitary elastic - E_sp = 1
• Elastic - E_sp >1
• Perfectly elastic - E_sp = Infinite