Important Questions for Class 12 Economics Concept of Supply and Elasticity of Supply

Theory of Producer’s Behaviour and Supply Important Questions for Class 12 Economics Concept of Supply and Elasticity of Supply

1.Supply It refers to various quantities of a commodity that the producers wish to sell at different possible prices of the commodity at a particular point of time.

2.Quantity Supplied It refers to a specific quantity supplied at a particular price, during a time period.

3.Individual Supply Supply of a particular commodity by an individual firm at a given price in the market is termed as individual supply.

4.Market Supply Quantities of a particular commodity offered for sale by all the firms at a given price in the market is known as market supply.

5.Factors Affecting Supply

(i)Own price of a commodity (P_x)

(ii)Price of related goods (P_r)

(iii) Number of firms in the industry (N f) .

(iv)Goal of the firm (G)

(v)Price of factors of production (P_f)

(vi)State of technology (T)

(vii) Business confidence or expectation (E_x)

(viii) Government policy (relating to taxation and subsidies) (G_p)

6.Supply Schedule It is a table showing a relationship between price and quantity supplied of a commodity.

7.Individual Supply Schedule It is a table showing different quantities of a commodity that an individual firm is ready to sell at different prices.

8.Market Supply Schedule It is a table showing different quantities of a commodity that all the firms in a market are willing to sell at different prices of that commodity at a given time.

9.Supply Curve It is a graphical presentation of supply schedule, showing positive relationship between price and quantity supplied of a commodity.

10.Individual Supply Curve Graphical presentation of the relationship between price and individual supply of a commodity is called individual supply curve

11.Market Supply Curve It is the graphical representation of market supply schedule. It is a horizontal summation of the individual supply curves.

12.Supply Function Supply function studies the functional relationship between supply of a commodity and its various determinants.

It is expressed in the following equation: S_x = F (P_x ,P_r,N _f,G,P_f,T,E_x,G_P)

13.Individual Supply Function It represents functional relationship between individual supply and factors affecting it. S_x ⁼ F (P_x, P_r, G,P_f,T, E_x,G_p)

14.Law of Supply According to the law, keeping other factors constant, their exist a positive relation between price of the commodity and its quantity supplied, i.e. as price increases, supply also increases and vice-versa.

15.Movement Along a Supply Curve or Change in Quantity Supplied When supply of a commodity changes due to change in price and other factors are remaining constant. It is called change in quantity supplied.

16.Extension of Supply It refers to expansion in quantity supplied in response to increase in own price of the commodity

17.Contraction of Supply It refers to contraction in quantity supplied in response to decrease in own price the commodity

18.Shift in Supply Curve or Change in Supply Shift in supply curve shows the situation of increase or decrease in supply, even own price of the commodity remains constant due to change in the factors.

19.Increase in Supply When supply of a commodity increases due to factors other than price is known as increase in supply. In this situation, supply curve shifts rightward

20.Causes for the Increase in Supply

(i)Fall in the price of substitute goods.

(ii)Fall in the price of factors of production.

(iii) Improvements in technology.

(iv)Increase in the number of firms in the market.

(v) Reduction in factor price.

(vi) Decrease in taxation.

21.Decrease in Supply When supply of a commodity decreases due to factors other than price is called decrease in supply. In this situation, supply curve shifts leftward.

22.Causes for the Decrease in Supply

(i)Rise in the price of substitute goods.

(ii)Rise in the price of factors of production.

(iii)Outdated technology.

(iv)Decrease in the number of firms in the market.

(v)Increase in factor price.

(vi)Increase in taxation.

23.Price Elasticity of Supply It is the responsiveness of quantity supplied due to change in price of own commodity. It is calculated as the percentage change in quantity supplied caused by a given percentage change in price of the commodity,

24. Percentage Method of Measuring Price Elasticity of Supply According to this method, Elasticity of Supply is the ratio between ‘percentage change in quantity supplied and‘percentage in price of the commodity

25.Perfectly Inelastic Supply (E_s = 0) When quantity supplied does not change at all in response to change in price of the commodity, its supply said to be perfectly inelastic

26.Less than Unit Elastic (E_s < 1) When percentage change in quantity supplied is less than the percentage change in price, supply is said to be less than unit elastic.

 

31.Commodities X and Y have equal Price Elasticity of Supply. The supply of X rises from 400 units to 500 units due to a 20% rise in its price. Calculate the percentage fall in supply of Y if its price falls by 8%. (Delhi 2009)

32.A firm supplies 200 units of a good at a price of Rs 5 per unit. When price changes it supplies 100 units less. Price Elasticity of Supply is 2.5. Calculate price after change. (All India 2009)

33.Explain the effect of rise in input prices on supply of a commodity.(Delhi 2009 c, 2008)

Ans. In case of increase in output price, Marginal Cost tends to rise. Accordingly, producers will supply less of the commodity at its existing price. This implies a backward shift in supply curve or decrease in supply, quantity falls from O Q to O Qt with same price level.

34.Explain the geometric method of measuring Price Elasticity of Supply. (Delhi 2008 C)

Ans. Geometrically, Elasticity of Supply depends on the origin of the supply curve. Assuming the supply curve to be a straight line and positively sloped.

We can have three possible situations of elasticity of supply as in the following diagrams:

(ii)E_s > 1, when a straight line, positively sloped supply curve starts from Y-axis.

(iii)E_s < 1, when a straight line, positively sloped supply curve starts from X-axis.

35.A 15% rise in the price of a commodity results in a rise in its supply from 600 units to 735 units. Calculate its Elasticity of Supply. (All India 2008)

36.State three causes of decrease in supply.(All India 2007)

or

State any three causes of a leftward shift of supply curve.(All India 2006)

Ans. Three causes of decrease in supply are:

(i)Increase in factor prices, causing increase in cost of production.

(ii) Decrease in number of firms in the industry.

(iii)Increase in price of a competing product or substitute product.

37.Draw straight line supply curves with Price Elasticity of Supply (i) Equal to one

(ii)Less than one (iii) More than one (All India 2007)

Ans. Geometrically, Elasticity of Supply depends on the origin of the supply curve. Assuming the supply curve to be a straight line and positively sloped.

We can have three possible situations of elasticity of supply as in the following diagrams:

(ii)E_s > 1, when a straight line, positively sloped supply curve starts from Y-axis.

(iii)E_s < 1, when a straight line, positively sloped supply curve starts from X-axis.

38.State three causes of increase in supply. (Delhi 2007 c)

or

State any three causes of a rightward shift of supply.(Delhi 2006)

Ans. Three causes of increase in supply are:

(i) Improvement in technology leading to a fall in cost of production.

(ii) Reduction in factor prices, causing a fall in cost of production.

(iii)Decrease in the price of a competing product or substitute.

4 Marks Questions

39.Explain how changes in price of other products influence the supply of a given product. (Dalhl 2012; All India 2009)

Ans. As resources have alternative uses, the quantity supplied of a commodity depends not only on its price, but also on the price of other commodities. Increase in the price of other goods makes them more profitable in comparison to the given commodity. As a result, the firm shifts its limited resources from production of the given commodity to production of other goods, as a result supply of concerned commodity falls.

For example, increase in the price of wheat will induce the farmer to use land for cultivation of wheat in place of rice.

40.Explain how changes in prices of inputs influence the supply of a product.(All India 2012)

Ans. In case of fall in input price, Marginal Cost will decline. Accordingly, producer will supply more of the commodity at its existing price. This implies a forward shift in supply curve or increase in supply, at same level of price.

In case of increase in output price, Marginal Cost tends to rise. Accordingly, producers will supply less of the commodity at its existing price. This implies a backward shift in supply curve or decrease in supply, quantity falls from OQ to OQt with same price level.

41.Define market supply. What is the effect on the supply of a good, when government imposes a tax on the production of that good? Explain. (Delhi 2011; All India 2009,2008)

Ans. Quantities of a particular commodity offered for sale by all the firms at a given price in the market is known as market supply.

If government imposes heavy taxes on the production of a particular commodity, the cost of production will increase and price remaining constant, it will result in reduction in profits. In this situation, the producer will shift his resources towards producing those commodities, on which government has imposed less taxes. As a result, supply of a particular commodity decreases.

42.What is a supply schedule? What is the effect on the supply of a good, when government gives a subsidy on the production of that good? Explain. (Delhi 2011)

Ans. (i) It is a table showing a relationship between price and quantity supplied of a commodity.

(ii) If government gives subsidy on the production of a particular commodity, the producer will earn higher revenues due to fall in cost, price remaining constant. This results in higher profits. In this situation, supply of a particular commodity increases.

43.The Price Elasticity of Supply of commodity X and Y are equal. The price of X falls from ? 10 to ? 8 per unit and its quantity supplied falls by 16%. The price of Y rises by 10%. Calculate the percentage increase in its supply. (Delhi 2009)

44.The Price Elasticity of Supply of commodity Y is half the Price Elasticity of Supply of

commodity X. 16% rise in the price X result in a 40% rise in its supply. If the price of

Y falls by 8%, calculate the percentage fall in its Supply. (All India 2009)

45.A producer supplies 200 units of a good at Rs 10 per unit. Price Elasticity of Supply is t How many units will the producer supply at Rs 11 per unit? (Delhi 2009 c)

46.Draw supply curves with Price Elasticity of Supply throughout equal to (i) 0 (ii) 1 (iii)Infinity (iv) Less than 1. (All India 2008)

Ans. (i) Es=0

E_s = 0, when supply does not respond to change in price of the commodity.

(ii) E_s =1,

(iv)E_s < 1,

E_s < 1, when a straight line, positively sloped supply curve starts from X-axis.

47.Explain any two factors that causes a shift of supply curve. (All India 2008)

Ans. Two factors that causes a shift of supply curve are:

(i) Change in technology Technological improvement tends to lower the Marginal Cost and Average Cost of production. As, better technology facilitates higher output with the same inputs. Accordingly, producers are willing to supply more at the existing price. This implies a rightward shift in supply curve.

(ii)Change in input price Input price may increase or decrease. In case of increase in input price, Marginal Cost and Average Cost tend to rise. Accordingly, producers will supply less of the commodity at its existing price. This implies a backward shift in supply curve and vice-versa.

48.Distinguish between change in supply and change in quantity supplied. Which of

these causes a shift of supply curve?(All India 2008)

Ans.Difference between change in supply and change in quantity supplied

Change in supply causes a shift of supply curve, i.e. due to change in other factors keeping price constant

49.Explain briefly the following determinants of supply

(i) Increase in the prices of inputs (ii) Decrease in tax on the product

(iii)Technological change (Delhi 2008)

Ans.(i)Increase in the prices of inputs :

In case of increase in output price, Marginal Cost tends to rise. Accordingly, producers will supply less of the commodity at its existing price. This implies a backward shift in supply curve or decrease in supply, quantity falls from OQ to OQt with same price level.

(ii)Decrease in tax on the product: If government reduces taxes on the production of a particular commodity, the cost of production decreases. This results in higher profits. As a result, supply of a particular commodity increases and supply curve shifts rightward.

(iii)Technological change:

Technological improvement tends to lower the Marginal Cost and Average Costs of production because better technology facilitates higher output with the same inputs. Accordingly, producers are willing to supply more at the existing price.

As a result profit of producer increases, and supply curve will shift to the right from 55 to 5₁5₁ and quantity increases from O Q to O Q_v with same level of price.

50.The Price Elasticity of Supply of a commodity is 2. When its price falls from Rs 10 to Rs 8 per unit, its quantity supplied falls by 500 units. Calculate the quantity supplied at the reduced price(Delhi 2006)

51.When the price of a commodity rises from Rs 10 to Rs 11 per unit, its quantity supplied rises by 100 units. Its Price Elasticity of Supply is 2. Calculate its quantity supplied at the increased price. (All India 2006)

52.A firm supplies 500 units of a good at a price of Rs 5 per unit. The Price Elasticity of Supply of a good is 2. At what price will the firm supply 700 units? (All India 2006)

53.Distinguish between change in Supply and change in quantity supplied. State two factors responsible for change in supply? (All India 2006)

Ans. Two factors that causes a shift of supply curve are:

(i) Change in technology Technological improvement tends to lower the Marginal Cost and Average Cost of production. As, better technology facilitates higher output with the same inputs. Accordingly, producers are willing to supply more at the existing price. This implies a rightward shift in supply curve.

(ii)Change in input price Input price may increase or decrease. In case of increase in input price, Marginal Cost and Average Cost tend to rise. Accordingly, producers will supply less of the commodity at its existing price. This implies a backward shift in supply curve and vice-versa.

 

Difference between change in supply and change in quantity supplied

Change in supply causes a shift of supply curve, i.e. due to change in other factors keeping price constant