UNIT:3PRODUCTION ANALYSIS

Prepared By:-Manoj Kumar Gautam

Production:- “It refers to the transformation of input into output”

For Example:-The input of raw cotton,labor,& capital results in the output of cloth.

You may find 10 units of capital & 5 units of labor are required to produce 100 units of commodity. It is this relationship b/w physical inputs(i.e 10 units of capital & 5 units of labor) & Physical output(100 units of commodity produced) which in economics is termed as production function.

Production Function:- “ it simply means the functional relationship between physical inputs & physical output of a commodity”.

The production function is purely a technical relation which connects factor inputs & factor outputs. It can be expressed by the formula:

Y=f(L,K,S) Y-Yield / Output L,K,S- Labour, capital, Land

Respectively

Production function explains in what proportion factor input should be combined to increase the production.

Factor inputs are- 1. Fixed factors:- are not related with the

volume of output. 2. Variable factors:- directly related with

volum of output. The distinction between these factors are

restricted to short run. In long run all factors are supposed to be variable.

So on the basis of above discussed , we can conclude that production function is the technical relationship between quantity of goods produced and factors of production (inputs) necessary to produce it.

Assumptions of production function

Perfect divisibility of both inputs and outputs

Limited substitution on one factor for the other

Technology is constant

Inelastic supply of fixed factor in short run

Features of Production function It indicates functional relationship b/w

physical inputs and outputs. It is always in relation to a period of time. It can specify either maximum output that

can be produced from a given sets of inputs or minimum quantity of inputs required to produce a given level of output.

It is purely a technical relationship. Output in production function is the result of

joint use of factor of production. It describe the law of production.

Types of production funtion

Short run production function:- input output relation where some inputs are fixed and quantities of other inputs are vary.

Long run production function:- input output relation where all inputs are variable.

Contd……….. Fixed Proportion & Variable

Proportion Production Function:- When amount of productive factor required to produce a unit of product remains fixed irrespective of level of production called fixed Proportion Where as factors required to produce a unit of product can be varied by substituting some other factor in its place called variable proportion

Contd………. Linear & Non Linear Production

Function:-If all factors are increased in some proportion output also increase in the same proportion.

nq=f(K,L)=f(nK,nL) & Vice versa in case of non linear

production function.

Cobb-Douglas Production Function

This was given by Cobb-Douglas . This model is based on emperical study

of american mfg. industry (1899-1922) It indicates production quantity as a

function of labour & Capital inputs. Results for emperical study was

published in American Economic review in March 1948

Results were- Capital Contribution-1/4th Labor contribution-3/4th

Contd……….. Q=ALαKβ Here Q-Yield/Output A- Efficiency

Parameters L,K- Labor &

Capital More efficient firm Have higher value of A α & β are elasticity of output w.r.t labor &

Capital These two exponent together measure

total % change in output for a given % change in input.

Contd….. Q=1.01L0.75K0.25

The above equation indicates that 1 percent change in labor input Capital remaining constant will result in 75% change in output also 1% change in capital labor remain const. will result 25% change in output.

Assumptions of Cobb-Douglas Production function

Production is function of two variable It is a linear function of one degree It assumes const. return to scale Perfect competition in the market No change in technology It shows multiplicative function i.e- the

output becomes zero if any inputs takes zero

Laws of variable production function

Law of variable proportion states that as the quantity of a variable input is increased by equal doses, the other inputs constant, total output will increase but after a point, at diminishing rate.

In simple words, the law of variable proportion states that with the increase of a variable factor, keeping other factors constant, the marginal product after rising to some extent becomes smaller and smaller.

It is called the law of variable proportion because if one factor is varied keeping other factors constant, the input output ratio also undergoes a change. The ratio between the variable factor and output changes so it is called the law of variable proportions.

ASSUMPTIONS It is possible to make change in the

factor of production. All units of variable factors are

homogenous. One is variable factor and others are

fixed factors. No change in the technique of

production and organization.

CAUSES FACTORS OF PRODUCTION ARE NOT

PERFECT SUBSTITUTE. FACTORS OF PRODUCTION ARE

SCARCE ALL FACTORS OF PRODUCTION

CANNOT BE CHANGED.

With the help of example we explain this law. It is assumed that land is a fixed factor and

labor is variable factor.

EXPLANATION

Fixed factor

Variable factor

TP MP AP

1 0 0 0 01 1 4 4 4 Stage

11 2 12 8 61 3 24 12 81 4 32 8 8 Stage

21 5 36 4 721 6 36 0 61 7 28 -8 4 Stage

31 8 16 -12 2

In this table land is a fixed factor and labor is a variable factor. The table shows the different amount of output by using different units of labor on one acre of land which is fixed.

0

50

100

150

200

250

1 2 3 4 5 6 7 8 9 10

Tota

l Pro

duct

ion

(In U

nits

)

Variable Input (Number of Workers)

Production Function Using Variable Amounts of Labor

S…

Stage of increasing returnsStage of diminishing returns

Stage of negative returns

There are three stages of law of variable proportions

INCREASE IN EFFICIENCY OPTIMUM COMBINATION

FIXED FACTORS INDIVISIBILITY OF FACTORS

DIVISION OF LABOUR

CAUSES OF INCREASING RETURNS

Total production continues to increase but at diminishing rates.

TP is maximum and MP is zero AP goes on diminishing because decline

in efficiency of labor. Second stages runs between 5 th and 6th

unit. MP and AP decline but remain positive. This stage is known as the stage of

diminishing returns.

STAGE II DIMINISHING RETURNS

SCARCITY OF FACTORSOPTIMUM COMBINATIONFIXED FACTORSIMPERFECT SUBSTITUTEIT IS VERY IMPORTANT LAW

CAUSES

IN THIS STAGE TP STARTS DECLINE MP BECOMES NEGATIVE 7 AND 8TH UNITS OF LABOR ARE EMPLOYED THIS STAGE STARTS WHEN MORE THAN om

UNITS ARE EMPLOYED. THIS STAGE IS CALLED NEGATIVE RETURNS

STAGE 3 (NEGATIVE RETURN )

This law guide about the possibility of operation. The producer will not produce in the first and third stage because in first stage the fixed factor ( capital) is underutilized and MR is negative and in third stage the variable factor labor is over utilized and MR is negative. So producer will always produce in second stage.

OPERATION

Long run Production Function(Law of return to scale)

The relation b/w quantities of output & scales of production in long run. When all inputs are increased in some proportion is called returns to scale

In order to meet long run change in the demand the firm increases its scale of production by increasing the quantities of all inputs of production.

In case all inputs increased in same proportion the effect on output may take in three forms.

Stages of return to scale Increasing return to scale Const. return to scale Decreasing return to scale

Assumptions All factors ( Inputs) are variable A worker work with tool & equipment Technology is const. There is perfect competition Pdt. Is measured in quantities

Causes of operation of law Internal & External Economies &

diseconomies of scale When Internal & External Economies

>Internal & External Diseconomies—Stage of Increasing return to scale

Vice Versa of Ist – Stage of Diminishing return to scale

When Const.—Constant return to scale

Economies of scale Internal Economies--Benefits obtained

by producers due to their individual efforts are known as Internal Economies.

Technical Economies Managerial Economies Labor Economies Marketing Economies Financial Economies

External economies of Scale

Benefits for which producers have not to make any individual efforts are known as external economies.

Economies of welfare Economies of Decentralisation Economies of Information Economies of Concentration

Diseconomies of Scale Managerial Diseconomies Financial Diseconomies Technical Diseconomies Marketing Diseconomies Entrepreneurial Diseconomies

Study of cost is essential for making a choice. Production decision are not possible with out their respective cost consideration since productive resource are scarce with alternative uses which involves sacrifies i.e. cost. Cost and Revenue are two major factor with which the profit maximising firms need to deal carefully.

Concept Of Cost

Concept Of Cost:The cost concept which are relevant

to business operations and decision can be grouped under two overlapping categories.

Two types of Cost Concept: Accounting cost concept Anatytical cost concept

cost

Accounting cost

Analytical cost

Business cost&Full Cost

Explicit costImplicit cost&Imputed Cost

Out of Packet&Book Cost

Total cost & ACMC

Short Run & Long Run

Incremental & Sunk Cost

Private & Social Cost

Historical & Replacement Cost

Opportunity cost & Actual Cost

Fixed & variable cost

Actual Cost and oppprtunity cost:Actual cost one the cost which the firm incurs while producing goods and services like cost on raw material , labour , rent interest. These cost are called out lay costs or absolute cost or acquistion cost.

Opportunity cost:Resource are scarce with alternative uses with different returns. The firm or owner of the input put these resource to most productive use and they expest income from the second best use of the resource. So opportunity cost may be defined as the expected returns from the second best use of the resource. It is also called alternative cost.

Business Cost:Business cost includes the expenses which are incurred to carry out a business. The concept of Business cost is similar to the actual or real cost. It includes all the payment made by the firm with the book cost of depreciation on plant and equipment. These cost are used for calculating business profit and losses and for filling returns for income tax and legal purpose.

Full Cost:The full cost includes business cost, opportunity cost and normal profit, Opportunity cost is the expected earning from the next best use of Firm’s resoure like Capital , land building and enterprenueue’s effort and time. The Firm must earn a necessary minimum return called Normal Profit.

Explicit Cost:These are the costs which fall under actual cost entered in the account book as wages and salaries materials, license fee, insurance premium depreciation chnges etc. These cost is important for loss and profit calculation.

Implicit Cost or Imputed Cost:Opportunity cost is the example of implicit cost. These cost do not take the form of cash outlays.They are not in accounting books.

For Eg: The interest payment on horrowed funds in an explicit cost and enters the accounting record when same fund is used by a person in his firm .

But for economics decision making the firm takes into account both explicit and implicit cost.

Out Of Pocket Cost:The items of expenditure ehich involves cash payment or cash transfers both recurring and Non recurring are known as Out of Pocket Cost’s.

Ex: Explicit cost W,R,r cost of material , Transfer Cost etc.

Book Cost:There are certain actual business costs which do not involves cash payment but a provision is made in books of account and they are taken into account while finalising the profit and loss account. Depreciation allowabces and unpaid interest.

Analytical Cost Fixed Cost:

Fixed costs are those cost which are fixed in volume for a certain given output it include ost of Managerial and adminstrative staff depreciation of Machinary. Maintenance of Law.

Variable Cost:Variable cost is dependent on volume of output i.e. Expenditure on Labour , raw material TC=FC+VC

Total Cost:Total cost is the total expenditure incured on the production of goods and services. It include both fixed and vaariable costs.

Average Cost:AC is obtained by dividing the total cost by the Total outputAC=TC/Q

Marginal Cost:Mc is the addition to the total cost on account of producing one additional unit of the product

MC=TCn- TCn-1 Short Run Cost:

Short run cost are the same as variable costs. They are the costs which varry with variation in output. The size of the firm is remaining the same

Long Run Cost:Long run costs are the cost which are incurred on fiwed capital assests like plant,building , machinery etc. Long run costs are by implication the same as fixed costs in long run fixed cost becomes variable cost as the size of the firm or sale of production.

Incremental Cost:Incremental costs are related with marginal cost. MC refres to the cost of marginal unit of output incremental cost refers to the total additional cost associated with the decisions to expe3nd the output. In long run when firm expend their production they hire more of men,machinary, material etc. This type of expenditure is incremental cost arises due to change in product lines ,introduction of a new product replacement of old Techniques of Production etc.

Sunk Cost:The sunk cost are those cost which can not be altered increase or decrease by varying the rate of output once. It is decided to make incremental investment expenditure and funds are allotted and spent all the preceding cost’s are considered to be the sunk cost.

Historical cost:It refers to the cost of an asset acquired in the past. It is used for accounting purpose in the assessment of net worth of the firm.

Replacement cost:Replacement cost refers to the outlay which has to be made for replacing an old asset.

Private Cost:Private cost are those cost’s which are actually incurred by an individual or a firm on the purchase of goods and services from the market for the firm all the actual cost ( Explicit & Implicit cost ) are private cost.

Social Cost:Social cost refer to the total cost

borne by the society due to production of the commodity social cost includes both private and external cost.

It includes the cost of resources for which the firm is not compelled to pay a price i.e. river , lakes , atmosphere etc.

Theory Of Cost And Output

The theory of cost deals with the behaviour of cost in relation to a change in output . Cost theory deals with cost output relations. The basic principle of the cost behaviour is that TC increase in ouput.

TC=f(Q), ΔTC/ ΔQ>0

Main determinants of Cost 1. Size of Plant

2. Output Level3. Price of Input4. Technology5. Marginal Efficiency

Relationship between cost and output

Cost function is the output function expressed in memory units. Cost function is depends on whether the time framework choosen for cost Analysis is short period or long period.

There are two types of cost function1. Short run cost function2. Long run cost function

Short Run Cost:Short run cost are those associated with variation in utilisation of fixed plant and other facilities. The short is a period which does not permit alternation in the fixed equipment and in the size of the organisation.

Long Run Cost:Long run cost is a period in which there is sufficent time to alter the equipment and size of organisation.

Cost output relation in short run

In short run cost are divided into overhead into two component.1. Fixed Cost( supplementry or overhead cost)2. Variable cost ( Prime Cost)

In short RunTC=TEC+TVC

Fixed Cost:Fixed cost are the sum of total of

expenditure incurred by the produes on the purchase of fixed factor of production. These cost do not change with the volume of output. They are known as induced cost. It includes expenses like Rent, Wages of permanent employ, licence fee etc.

0

2

4

6

8

10

12

0 1 2 3 4 5 6 7

Unit of output fixedcost 0 101 102 103 104 105 106 10

The Curve Fc is parallel to X axis. It means what ever be the volume of output, The cost will remain fixed.

Variable Cost:Variable cost are th expenditure incurred by the

producer on the use of variable factor of production. When the output changes these cost also change, As the output increase these cost also increase and or the output decrease, these cost are also decrease when the output is zero. There cost are also zero. They are called direct cost in includes expenses like purchase of raw material , wages os causial labour, electricity charges, wear and tear expenses.

Unit of output variable cost0 01 102 183 244 285 326 38

0

5

10

15

20

25

30

35

40

0 1 2 3 4 5 6 7

Table shows that as the output goes on increasing the variable cost also go on increasing.when ouput is zero variable cost are zero when ouput reaches six unit the variable cost are 38. VC curve in the diagram is an upward sloping curve. It means that cost are increasing with increased ouput.

Relation between TC,FC,VCOutput FC VC TC(FC+VC) 0 10 0 10

1 10 10 202 10 18 28

3 10 24 344 10 28 385 10 32 426 10 38 48 0

10

20

30

40

50

60

0 1 2 3 4 5 6 7

In a tableTotal cost is the aggregate of FC & VC with the increase in output total cost is also increasing.

In diagram ox shows output and oy shows cost curves.FC line represents Fixed cost curve and VC is Variable cost and TC is Total cost. TC & VC curves are parallel to each other.

Average Cost

Average cost is the cost per unit of ouput produced. It is also called unit cost of production.

AC=TC/Q

AC=AFC+AVC

AFCAFC=TFC/Q

Output Fixed cost AC 1 10 10 2 10 5 3 10 3.3 4 10 2.5 5 10 2 6 10 1.67 7 10 1.42 8 10 1.25

0

2

4

6

8

10

12

0 2 4 6 8 10

The curve slopes down wards to the right AFC curve represents AFC. It includes that AFC can never be zero so it is not possible that AFC touches ox axis. A curve with this property that if we take any point on AFC curve and multiply the AFC with output the products is always same as product taken on any other on the same curve is called rectangular Hyperbola.

AVC AVC=TVC/QOutput VC AVC 1 10 10 2 18 9 3 24 8 4 28 7 5 32 6.4 6 38 6.3 7 46 6.6 8 62 7.7 0

2

4

6

8

10

12

0 2 4 6 8 10

AVC resembles english alphabat ‘U’ upto 6th unit curv is falling because as the output increase AVC falls. The curve starts moving upward from 7th unit. The space of AVC is U shaped because law of variable proportion is implemented first. AVC falls then it becomes constant and finally it raises.

AC is the summation as ( AFC+AVC )AC=AFC+AVC

It is vertical summation when AC,AFC, are measured on Y axis, It is vertically adding up the values of AFC & AVC.

Output 01 AVC LT AFC LK AC=AVC+AFC=LT+LK=LS OL1 =AVC=L1T1,AFC AC=L1T1+L2T2=L1S1 Output L2 AVC=L2T2 AC=L2K1+L2T2=L2T2

s

T T1

T2

s1

s2 AVC

AC

AFC

L L1

L2

X

o

K1k

output

AC,A

FC,A

VC c

ost

Marginal Cost Marginal Cost is the addition to total cost

due to addition of one unit of output. MC =Tcn-Tcn-1

orMC=ΔTC/ ΔQ

MC curve is short period.

Output FC VC TC MC 0 10 0 10 - 1 10 10 20 10 2 10 18 28 8 3 10 24 34 6 4 10 28 38 4 5 10 32 42 4 6 10 38 48 6 7 10 46 56 8 8 10 62 72 160

2

4

6

8

10

12

14

16

18

0 2 4 6 8 10

It is clear from the table is that in the beginning the Mc of every additional unit goes on diminishing but after a given level of output the MC cost of every additional unit goes on increasing. In diagram OX shows output and OY shows MC. MC curve is U shaped in the initial stages of production Mc is falling but later in it rising because of Law of variable proportion.

Output TC AC MC 0 10 Infinity - 1 20 20 10 2 28 14 8 3 34 11.3 6 4 38 9.5 4 5 42 8.4 4 6 48 8 6 7 56 8 8 8 72 9 16

Relation between AC & MC

0

5

10

15

20

25

0 2 4 6 8 10

AC & MC re caculated from TCAC=TC/QMC=Tcn-Tcn-1

When AC falls, Mc is lower than AC When AC rises MC is greater than AC MC cuts AC at it’s lowest pointRelation between TC & MC MC is estimated by the differences between TC of two

succassive units of outputMC=Tcn-Tcn-1

When the rate of increase in TC stops diminshing , the MC is at it’s minimum.

When the rate of increase in TC start rising , the MC is increasing.

MC curve should be shown cutting both AC and AVC at their lower point.

When AC deblines MC deblines faster than AC so MC curve remains below AC curve.

When AC increases MC increases faster than AC so MC curve is above AC curve.

MC must cut AC from it’s lowest point.

AC may continue to deblines even when MC is rising.

MCAC

AVC

AFCA

Q Q’ output

B

cost

Long run is a period in which all the input’s become variable. The long run cost output relation imply the relationship between the changing scale of the firm and total output.

Long run total cost curve ( LTC)All the cost’s are variable cost’s in

the long run shape of LTCC remains the same as of STCC. It first increases at a diminshing rate, then it tends to increases at a constant rate and finally it rises at an increasing rate.

Long run cost output relation

LTTC Long period TCC starts from the origion

suppose the firm has only one plant and it’s short run total cost is STC’ if there is rise in demand and firm wants to incrases the output from Q’ the firm can increases variable input’s like labour and raw material. In such case the short run cost average cost will be high, if demand lasi’s for a long period then the firm will set a new plant i.e. ST2 and ST3 etc. Now LTC can drawn through the minimum points of STC1, STC2 and STC3.

Long run AC ( LAC) The long run AC curve is

decreased by combining the short run average cost curve. The firm has a service of SAC curves, each having a bottom point showing the minimum Sac. When AC has one plant C,C1 is maximum if seconed plant has been set , AC will decreases from C1Q1 to C2Q2, When the secones plant is added rises to C3Q3 after the addition of the third plant. LAC curve can be drawn through the SAC1, SAC2 and SAC3. It is known as envelop curve or planning curve.

Q1 Q2 Q3output

C1

C2C3

SAC1

SAC2

SAC3

LAC

AC

The long run LMCC is defined from the short run marginal cost curve.

The deviation of LMC is illustrated in the diagram. In the long run point ABC determine the output levels at different level of production i.e. Q1,Q2,Q3.

AQ, cuts SMC1 at M point. It means that at output OQ1 LMC is MQ1 if output increases from Q1 to Q2 LMC rises to BQ2 and increases in ouput from Q2 to Q3, CQ3 measured the LMC.

LMC must equal to SMCLAC=SAA is the point of tengency at point B=SAC2=SMC2=LAC=LMC

LMC: Long run marginal cost curve

Supply It refers to various quantities of

commodity which a producer will actually offer for sale at a particular time at various corresponding prices.

Accoeding to K.E.Boulding- “The relation b/w a price & the quantity supplied is rather like a relation b/w whistle & dog.Louder the whistle the faster comes the dog. Raise the price and quantity supplied increases.

Individual Supply and Market Supply

Individual supply refers to supply of a commodity by an individual firm in the market. Market supply refers to supply of a commodity by all the firms in the market producing/selling that particular commodity.

Supply Schedule

Supply schedule is a tabular presentation of various quantities of a commodity offered for sale corresponding to different possible prices. It has two aspects (1) Individual Supply Schedule, (2) Market Supply Schedule.

 

(1) Individual Supply Schedule

Individual supply schedule refers to supply schedule of an individual firm in the market. It shows supply response of a particular firm in the market.

(2) Market Supply Schedule-Market supply schedule refers to supply schedule of all the firms in the market producing/supplying a particular commodity. Sum total of the firms producing a particular commodity is called ‘Industry’. Thus, market supply schedule refers to the supply schedule of the industry as a whole. It shows supply response of all the firms (producing a particular commodity) in the market.

Supply Curve

Supply Curve is a graphic presentation of

supply schedule, indicating positive

relationship between price of a commodity and

its quantity supplied.

(1) Individual Supply Curve

(2) Market Supply Curve

76

Supply function studies the functional relationship between supply of a commodity and its various determinants. The supply of a commodity mainly depends on the goal of the firm, price of the commodity, price of other goods, prices of factors of production used in the production of the commodity and state of technology.

Supply Function

In other words, supply of a commodity is a function of several factors as expressed in the from of the following equation:

SX = f (PX, PO, NF, G, PF, T EX, GP)

Here, SX = Supply of commodity X;f = Functional relation; PX = Price of commodity X; PO = Price of other goods; NF = Number of firms, G = Goal of the firm, PF = Price of factors of production, T = Technology; EX = Expected future price; GP= Government policy)

Factors Affecting Supply Price Price of related goods Cost of production State of technology Goal of producer Natural factors Means of transportation Length of time Other factors like govt. policy, taxation, fear

of war, strikes, lockouts,change in price.

Law of supply It shows a direct relationship b/w price

supply of a commodity. The law states that “price of a commodity increase, the quantity of commodity supplied per unitof time increases & vice versa. Assuming all other factors influencing supply remain const.”

Change in price is cause & change in supply is effect.

Figure 4: The Supply Curve

F

G

2.00

S

40,000 60,000

$4.00

At $4.00 per bottle, quantity supplied is 60,000 bottles (point G).

When the price is $2.00 per bottle, 40,000 bottles are supplied (point F).

Number of Bottles per Month

Price per Bottle

Assumptions of the Law of Supply

There is no change in the prices of the factors of production.

There is no change in the technique of production.

There is no change in the goal of the firm. There is no change in the prices of

related goods. Producers do not expect change in the

price of the commodity in the near future.

Exceptions to the Law of Supply

The Law of supply does not apply strictly to agricultural products whose supply is governed by natural factors.

Supply of goods having social distinction will remain limited even if their price may rise high.

Sellers may be willing to sell more units of perishable goods although their price may be falling.

Price(RS) Supply(Units)1 52 103 154 20

Shifts vs. Movements Along the Supply Curve

A change in the price of a good causes a movement along the supply curve In Figure 4

A rise (fall) in price would cause a rightward (leftward) movement along the supply curve

A drop in transportation costs will cause a shift in the supply curve itself In Figure 5

Supply curve has shifted to the right of the old curve (from Figure 4) as transportation costs have dropped

A change in any variable that affects supply—except for the good’s price—causes the supply curve to shift

Figure 5: A Shift of The Supply Curve

S2

G J

S1

60,000

$4.00

80,000

A decrease in transportation costs shifts the supply curve for maple syrup from S1 to S2.

Number of Bottles per Month

Price per Bottle

At each price, more bottles are supplied after the shift

Elasticity of Supply Measures the degree to which the quantity

supplied responds to price changes.

% change in quantity supplied of a commodity ES = -------------------------------------------------------------------

% change in price of the commodityOR

Change in Qty supplied----------------------------------------

Original supply--------------------------------------------------------------------------- × 100

Change in price--------------------------------

Original price

Price Elasticity of Supply

Price elasticity of supply is the measure of change in supply of a commodity de to change in its price. Law of supply tells us the direction in which supply will change as a result of change in price; that is fall and rise in price will lead to contraction and extension of supply. But, if we want to know how much supply will extend due to 10 percent rise in price, or, in what proportion the supply will change, then we will have to study price elasticity of supply. Thus, price elasticity of supply is the proportionate change in supply consequent upon proportionate change in price.

Factors Affecting Elasticity of Supply

The following are the main factors which affect the elasticity of supply of a commodity:

Nature of the Inputs used Natural Constraints Risk Taking Nature of the Commodity: Perishable goods are relatively

less elastic in supply than durable goods Cost of Production Time Factor

Very Short Period Short Period Long Period

Technique of Production

Degrees of Elasticities of Supply

Es=0 Es=∞ Es>1 Es<1 Es=1 Cross Elasticity of supply