# Chapter 4: Supply Analysis (Latest Edition)

09 Nov 2020 2:44 pm

Balbharati, solutions, for, Economics, HSC, 12th, Standard, Maharashtra, State, Board, Chapter 4, Supply, Analysis,

### Q.1. Complete the following statement:

1. When the supply curve is upward sloping, it’s slope is _______.

positive

negative

first positive then negative

Zero

2. An upward movement along the same supply curve shows _______.

contraction of supply

decrease in supply

expansion of supply

increase in supply

3. A rightward shift in supply curve shows _______.

contraction of supply

decrease in supply

expansion of supply

increase in supply

4. Other factors remain constant, when less quantity is supplied only due to a fall in price, it shows ________.

contraction of supply

decrease in supply

expansion of supply

increase in supply

5. Net addition made to the total revenue by selling an extra unit of a commodity is ______.

total Revenue

marginal Revenue

average Revenue

marginal Cost

### Q.2. Complete the Correlation:

1. Expansion of supply : Price rises :: Contraction of supply :Price fall.

2. Total revenue : P×Q  :: Average revenue : TR/TQ

3. Total cost : TFC + TVC :: Average revenue : TC/TQ

4. Demand curve : downward :: Supply curve : Upward.

5. Demand curve : downward :: Supply curve : Upward.

### Q.3. Give economic term:

1. Cost incurred on fixed factors.

Ans: – Total Fixed Cost.

2. Cost incurred per unit of output.

Ans – Average Cost

3. Net addition made to total cost of production.

Ans: – Marginal Cost

4. Revenue per unit of output sold.

Ans: –Average Revenue

### Q.4. Distinguish between:

1. Stock and Supply.

### STOCK SUPPLY

2. Expansion of Supply and Increase in Supply

3. Contraction of Supply and Decrease in Supply

4. Average revenue and Average cost.

### (A) Supply schedule of chocolates

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Solution: –

1. Complete the above supply schedule.

### 2. State the relationship between price and quantity supplied

Solution:-

a. There is a direct relationship between price and quantity supplied.

b. The supply curve is a positive slope.

c. As the price increases the quantity supplied also increases.

d. At the lowest price 10 quantity supplied is less 200, at the highest price 40 the quantity supplied us the highest 500.

e. Supply curve moves upward from left to right.

### Draw the market supply curve from the schedule and explain it.

Diagram

Note: –May be there is a printing mistake in question table because the supply curve is always increased

1. X-axis represents quantity supplied and Y-axis represents the price of the commodity.

2. Supply curve ‘SS’ slopes upwards from left to right which has a positive slope.

3. It indicates a direct relationship between price and quantity supplied.

## A) Cost Concepts:

When an entrepreneur undertakes an act of production, he has to use various inputs like raw material, labour, capital etc. He has to make payments for such inputs. The expenditure incurred on these inputs is known as the cost of production. Cost of production increases with an increase in need of output. There are three types of costs which are as follows:

1) Total Cost (TC):

Total cost is the total expenditure incurred by a firm on the factors of production required for the production of goods and services. Total cost is the sum of total fixed cost and total variable cost at various levels of output.

TC = TFC + TVC

TC = Total cost

TFC = Total Fixed Cost

TVC = Total Variable Cost

Total Fixed Cost (TFC):

Total fixed costs are those expenses of production which are incurred on fixed factors such as land, machinery etc.

Total Variable Cost (TVC):

Total variable costs are those expenses of production which are incurred on variable factors such as labour, raw material, power, fuel etc.

2) Average Cost (AC):

Average cost refers to cost of production per unit. It is calculated by dividing total cost by total quantity of production.

AC = TC/TQ

TCTQ

AC = Average cost

TC = Total cost

TQ = Total quantity

3) Marginal cost (MC):

Marginal cost is the net addition made to total cost by producing one more unit of output.

MCn = TCn – TCn-1

n = Number of units produced

MCn = Marginal cost of the nth unit

TCn = Total cost of nth unit

TCn-1 = Total cost of previous units

## B) Revenue Concepts:

The term ‘revenue’ refers to the receipts obtained by a firm from the sale of certain quantities of a commodity at given price in the market. The concept of revenue relates to total revenue, average revenue and marginal revenue.

1) Total Revenue (TR):

Total revenue is the total sales proceeds of a firm by selling a commodity at a given price. It is the total income of a firm. Total revenue is calculated as follows:

Total revenue = Price × Quantity

2) Average Revenue (AR):

Average revenue is the revenue per unit of output sold. It is obtained by dividing the total revenue by the number of units sold.

AR = TR/TQ

TRTQ

AR = Average Revenue

TR= Total Revenue

TQ =Total Quantity

3) Marginal Revenue:

Marginal revenue is the net addition made to total revenue by selling an extra unit of the commodity.

MRn = TRn – TRn-1

MRn = Marginal revenue of nth unit

TRn = Total revenue of nth unit

TRn-1 = Total Revenue of previous units

n = Number of units sold

### 2. What are the determinants of supply?

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Answer: – According to Paul Samuelson, “Supply refers to the relation between market prices and the number of goods that producers are willing to supply.’’

Supply refers to the quantity of a commodity that a seller is willing and able to offer for sale at a given price, during a certain period of time.

The following are the determinants supply of a commodity:

i. Price of commodity – Other things remaining constant, at higher prices, the producers prefer to increase their sales by increasing their supply and vice-versa.

ii. Price of related goods – A rise in the prices of substitute goods will lead to a decrease in the supply of other goods and vice-versa. On the other hand, a rise in the price of complementary goods will lead to an increase in the supply of other goods.

iii. Cost of production – If the price of inputs increases, the cost of production also increases, other things remaining the same. An increase in the cost of production decreases the profits of the supplier and, consequently, lesser quantity is supplied at the given price.

iv. State of technology – Other things remaining the same, if the level of available technology appreciates, the per unit cost of production goes down, which implies higher supply of output and vice-versa.

v. Government policy – Other things remaining constant, if the government policies are more stringent and strict such as a high rate of tax, the cost of production will rise. The high cost of production will discourage the producer and thereby, supply will decrease.

vi. Goal of firm – If a particular firm aims at maximizing its profit, more units of output will be supplied at a higher price, which will result in a higher profit. On the other hand, if the firm aims at maximization of sales, more of the output will be sold at the same price to maximize sales.

vii. Natural factors – Other things remaining the same, in the event of any natural calamity, such as an earthquake, flood, etc., the supply of output will fall.

viii. Government policy: Favourable Government policies may encourage supply and unfavourable government policies may discourage the supply. Government policies like taxation, subsidies, industrial policies, etc. may encourage or discourage production and supply, depending upon government policy measures.

ix. Future expectations about price: If the prices are expected to rise in the near future, the producer may withhold the stock. This will reduce the supply and vice versa.

## Q.7. Answer in detail

### 1. Explain the law of supply and its exceptions.

Answer: – The law of supply is also a fundamental principle of economic theory like the law of demand. It was introduced by Prof. Alfred Marshall in his book, ‘Principles of Economics’ which was published in 1890. The law explains the functional relationship between price and quantity supplied.

Statement of the Law:

“Other things being constant, higher the price of a commodity, more is the quantity supplied and lower the price of a commodity less is the quantity supplied”.

In simple words, “other factors remain constant, a rise in price results in a rise in the quantity supplied and vice-versa. Thus, there is a direct relationship between price and quantity supplied.

Symbolically,

Sx = f (Px)

S = Supply

x = Commodity

f = Function

P = Price of commodity

Law of supply is explained with the help of the following schedule and diagram:

In the above table explains the direct relationship between price and quantity of commodity supplied.

When price rises from ₹ 10 to 20, 30, 40 and 50, the supply also rises from 100 to 200, 300, 400 and 500 units respectively.

It means, when price rises supply also rises and when the price falls supply also falls.

Thus, there is a direct relationship between price and quantity supplied which is shown in following figure:

Diagram

In the above figure, X-axis represents quantity supplied and Y-axis represents the price of the commodity. Supply curve ‘SS’ slopes upwards from left to right which has a positive slope. It indicates a direct relationship between price and quantity supplied.

### Exceptions to the Law of Supply:

Following are the exceptions to the law of supply:

1) Supply of labour:

Labour supply is the total number of hours that workers work at a given wage rate. It is represented graphically by a supply curve. In the case of labour, as the wage rate rises the supply of labour (hours of work) would increase. So the supply curve slopes upward. Supply of labour (hours of work) falls with a further rise in wage rate and supply curve of labour bends backward. This is because the worker would prefer leisure to work after receiving a higher amount of wages. Thus, after a certain point when the wage rate rises the supply of labour tends to fall.

It can be explained with the help of a backward bending supply curve. The following table and diagram explain the backward bending supply curve of labour.

Diagram: –

In the above figure, the supply of labour (hours of work) is shown on X-axis and wage rate per hour is shown on the Y-axis. The curve SAS represents the backward bending supply curve of labour. Initially, when the wage rate is ₹ 100 per hour, the hours of work are 5. The total amount of wages received is ₹ 500. When the wage rate rises from ₹ 100 to ₹ 200, hours of work will also rise from 5 hours to 7 hours and the total amount of wages would also rise from ₹ 500 to ₹ 1400. At this point, labourers enjoy the highest amount i.e. ₹ 1400 and work for 7 hours. If the wage rate rises further from ₹ 200 to ₹ 300, the total amount of wages may rise, but the labourer will prefer leisure time and denies working for extra hours. Thus, he is ready to work only for 6 hours. At point A, the supply curve bends backward, which becomes an exception to the law of supply.

2) Agricultural goods: The law of supply does not apply to agricultural goods as they are produced in a specific season and their production depends on weather conditions. Due to unfavourable changes in weather, if the agricultural production is low, their supply cannot be increased even at a higher price.

3) Urgent need for cash: If the seller is in urgent need for hard cash, he may sell his product at which may even be below the market price.

4) Perishable goods: In case of perishable goods, the supplier would offer to sell more quantities at lower prices to avoid losses. For example, vegetables, eggs etc.

5) Rare goods: The supply of rare goods can not be increased or decreased according to its demand. Even if the price rises, supply remains unchanged. For example, rare paintings, old coins, antique goods etc.

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