Understanding Law of SupplyHWA
Supply is of the scarce goods. It is the amount of a commodity that sellers are able and willing to offer for sale at different price per unit of time.
LAW OF SUPPLY
There is direct relationship between the price of a commodity and its quantity offered fore sale over a specified period of time. When the price of a goods rises, other things remaining the same, its quantity which is offered for sale increases as and price falls, the amount available for sale decreases. This relationship between price and the quantities which suppliers are prepared to offer for sale is called thelaw of supply.
The supply function can also be expressed in symbols.
QxS = Φ (Px, Tech¯, S¯i, F¯n, X¯……..)
Qxs = Quantity supplied of commodity x by the producers
Φ = Function of.
Px = Price of commodity x.
Tech = Technology.
S = Supplies of inputs.
F = Features of nature.
X = Taxes/Subsidies.
————= Bar on the top of last four non-price factors indicates that these variables also affect the supply but they are held constant.
PRICE ELASTICITY OF SUPPLY
“Price elasticity of supplymeasures how responsive producers are to a change in the price of good. It is defined as a measure of the responsiveness of quantity supplied to change in price”.
A given output can be produced with many different combinations of factors of production (land, labor, capita! and organization) or inputs. The output, thus, is a function of inputs. The functional relationship that exists between physical inputs and physical output of a firm is called production function.
Q = f (x1, x2, ……., xn)
Q is the maximum quantity of output and x1, x2, xn are quantities of various inputs. The functional relationship between inputs and output is governed by the laws of returns.
MARGINAL RATE OF SUBSTITUTION (MRTS)
Marginal rate of technical substitution (MRTS) is the rate at which one factor can be substituted for another while holding the level of output constant.
The slope of an isoquant shows the ability of a firm to replace one factor with another while holding the output constant. For example, if 2 units of factor capital (K) can be replaced by 1 unit of labor (L), marginal rate of technical substitution will be thus:
THE MARGINAL PRODUCT APPROACH
In the long run, a firm can vary the amounts of factors which it uses for the production of goods. It can choose what technique of production to use, what design of factory to build, what type of machinery to buy. The profit maximization will obviously want to use that mix of factors of combination which is least costly to it. In search of higher profits, a firm substitutes the factor whose gain is higher than the other. When the last rupee spent on each factor brings equal revenue, the profit of the firm is maximized. When a firm uses different factors of production or least cost combination or the optimum combination of factors is achieved when:
In the above equation a, b, c, n are different factors of production. Mpp is the marginal physical product. A firm compares the Mpp / P ratios with that of another. A firm will reduce its cost by using more of those factors with a high Mpp / P ratios and less of those with a low Mpp / P ratio until they all become equal.