Law of Supply or Theory of Supply is fundamentally
known as Supply Analysis with the help of which producer behavior can be
identified in the market. In the law of supply we find that when price of the
product is increasing, supply of the product is also going up and similarly
when price of the product is declining supply of the product is getting
downward trend. Therefore in the supply analysis we observe a positive
relationship between supply of the product and price of the product. This
is the rational behavior of the producer in the market which is based on the
fundamental objective of the producer, i.e.,
profit maximization. This type of producer behavior is known as Law of
Supply or Theory of Supply which is popularly known as Supply Analysis.
Elasticity of Supply
Elasticity of supply is another important contribution
in the supply analysis. Elasticity of Supply is based derived from law of
supply on theory based on supply function. Elasticity of Supply is the
measurement of the responsiveness of change in supply of the product due to
change in price of the product. The sign of Elasticity of Supply is always
positive. Elasticity of Supply can be measured with the help of following
formula from which we get different types of result and each result represents
one specific type of Elasticity of Supply:
Elasticity of Supply = (proportional change in supply)
/ (proportional change in price)
or,
ELASTICITY OF SUPPLY = [(change in supply)/(original
supply)] / [(change in price)/(original price)]
or,
ELASTICITY OF SUPPLY = [(change in supply)/(original
supply)] X [(original price)/(change in price)]
or,
ELASTICITY OF SUPPLY = [(change in supply)/(change in
price)] X [(original price)/(original supply)]
When,
Result > 1,
It is Elastic Supply and in this situation we observe
that rate of change of supply is always more than rate of change in price.
Result < 1,
It is Inelastic Supply and in this situation we
observe that rate of change of supply is always less than rate of change in
price.
Result = 1,
It is Unit Elastic Supply and in this situation we get
that rate of change in supply and rate of change in price both become
identical.
Result = 0,
It is Perfectly Inelastic Supply. In this situation we
observe that rate of change in supply is always zero whatever may be the rate
of change in price.
Result = infinity,
It is Perfectly Elastic Supply and in this situation
we observe that there may be a very significant change in supply due to very
small change in price or even sometimes there is at all no change in price.
Therefore, it is finally observed that law of supply
and elasticity of supply are very effective contributions in the study of
producer’s behavior.