INTRODUCTION TO ECONOMICS AND INDIAN ECONOMY

By Dr. JONARDAN KONER

ASSOCIATE PROFESSOR NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH, PUNE.
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INTRODUCTION
Economics is the study of how economic agents or societies choose to use scarce productive resources that have alternative uses to satisfy wants which are unlimited and of varying degrees of importance. The main concern of economics is economic problem: its identification, description, explanation and solution. The source of any economic problem is scarcity. Scarcity of resources forces economic agents to choose among alternatives. Therefore, economic problem can be said to be a problem of choice and valuation of alternatives. The problem of choice arises because limited resources with alternative uses are to be utilized to satisfy unlimited wants, which are of varying degrees of importance. 2

INTRODUCTION
Scarcity is a relative concept. It can be define as excess demand, i.e., demand more than the supply. For example, unemployment is essentially the scarcity of jobs. Inflation is essentially scarcity of goods. Economics is essentially the study of logic, tools and techniques of making optimum use of the available resources to achieve the ends. Economics thus provides analytical tools and techniques that managers need to achieve the goals of the organization they manage. Therefore, a working knowledge of economics, not necessarily a formal degree, is essential for mangers. The job of any efficient manager is of economic one.
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INTRODUCTION
Decision-making is the main job of management. Decision-making involves evaluating various alternatives and choosing the best among them. For example, a marketing manager is to allocate his / her advertising budget among various media in such a way so as to maximize the reach. Managers are essentially practicing economists. In performing his/her functions, a manager has to take a number of decisions in conformity with the goals of the firm. Many business decisions are taken under the condition of uncertainty and risk.
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INTRODUCTION
Uncertainty and risk arise mainly due to uncertain behavior of the market forces, changing business environment, emergence of complexity of the modern business world and social and political, external influence on the domestic market and social and political changes in the country. The complexity of the modern business world adds complexity to business decision-making. However, the degree of uncertainty and risk can be greatly reduced if market conditions are predicted with a high degree of reality. The prediction of the future course of business environment alone is not sufficient. It is important equally to take appropriate business decisions and to formulate a business strategy in conformity with the 5 goals of the firm.

A GENERAL LISTING OF DESIRED ECONOMIC GOODS & LIMITED RESOURCES

Economic Goods (Wants) Food (Rice, Bread, Milk, Eggs,

Vegetables, Tea, Coffee, Sugar, etc.)

Limited Resources Land (Various Degrees of Fertility) Natural Resources ( Rivers, Trees,
Minerals, Oceans, etc.)

Clothing (Shirts, Pants, Shoes, Socks, Coats, Sweaters, etc.) Household Goods (Tables, Chairs, Rugs, Beds, TV, Dressers, etc.) Education National Defense Recreation Leisure Time Entertainment Clean Air Pleasant Environment (Trees, Lakes, Rivers, Open Space, etc.) Pleasant Working Conditions More Productive Resources

Machines Made

and

Other Human-

Physical Resources Non-Human Animal Resources Technology (Physical and Scientific

Recipes of History)

Human Resources (Knowledge, Skill,

And talent of Individual Human Beings)

DEFINITIONS OF ECONOMICS
Economics has been defined in many ways. Samuelson summarized some of them and they are as follows. Economics analyses how a societys institutions and technology affect prices and the allocation of resources among different uses. Economics explores the behavior of the financial markets, including interest rates and stock prices. Economics examines the distribution of income and suggests ways that the poor can be helped without harming the performance of the economy. Economics studies the business cycle and examines how monetary policy can be used to moderate the swings in unemployment and inflation. Economics Studies the patterns of trade among nations and analyses the impact of trade barriers. Economics looks at growth in developing countries and 7 proposes ways to encourage the efficient use of resources.

NATURE OF MANAGERIAL ECONOMICS

Taking appropriate business decisions requires a clear understanding of the technical and environmental conditions under which business decisions are taken. Application of economic theories to explain and analyze the technical conditions and the business environment contributes a good deal to the rational decision-making process. Economic theories have, therefore, gained a wide range of application in the analysis of practical problems of business. With the growing complexity of business environment, the usefulness of economic theory as a tool of analysis and its contribution to the process of decision-making has been widely recognized.
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NATURE OF MANAGERIAL ECONOMICS

Baumol has pointed out three main contributions of economic theory to business economics. First, 'one of the most important things which the economic theories can contribute to the management science' is building analytical models, which help to recognize the structure of managerial problems, eliminate the minor details, which might obstruct decision-making and help to concentrate on the main issue. Secondly, economic theory contributes to the business analysis 'a set of analytical methods' which may not be applied directly to specific business problems, but they do enhance the analytical capabilities of the business analyst. Thirdly, economic theories offer clarity to the various concepts used in business analysis, which enables the managers to avoid conceptual pitfalls. 9

SCOPE OF MANAGERIAL ECONOMICS

The problems in business decision-making and forward planning can be grouped into four categories as follows: Problems of Resource Allocation: Source resources are to be used with utmost efficiency to get the optimal results. These include production programming and problems of transportation, etc. Inventory and Queuing Problems: Inventory problems involve decisions about holding of optimal levels of stocks of raw materials and finished goods over a period. These decisions have to be taken by considering demand and supply conditions. Queuing problems involve decisions about installation of additional machines or not hiring labor, against the cost of such machines or labor. 10

SCOPE OF MANAGERIAL ECONOMICS

Pricing Problems Fixing prices for the products of the firm are important decision-making problems. Pricing problems involve decisions regarding various methods of pricing to be followed. Investment Problems It is related of allocating resources over time. These normally relate to investing new plants, how much to invest, expansion programs for the future, sources of funds, etc.
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BRANCHES OF ECONOMICS
MICROECONOMICS Adam Smith is the founder of the field of Microeconomics, the branch of economics which today is considered with the behavior of individual entities such as markets, firms and households. In The Wealth of Nations (1776), Smith considered how individual prices are set, studied the determination of price of land, labor, and capital, and enquired into the strengths and weakness of the market mechanism. He identified the most important efficiency properties of markets and saw that economic benefit comes from the selfinterested actions of individuals. These remain important issues today also.
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BRANCHES OF ECONOMICS
MACROECONOMICS Macroeconomics started its journey when John Maynard Keynes published his revolutionary General Theory of Employment, Interest and Money (1936). It studies of the overall performance of the economy. At the time, England and USA were still stuck in the Great Depression of the 1930s, with over one-quarter of the American labor force unemployed. In his new theory, Keynes developed an analysis of what causes business cycles, with alternative spells of high unemployment and high inflation. Now, macroeconomics examines a wide variety of areas, such as how total investment and consumption are determined, how central banks manage money and interest rates, what causes international financial crisis, and why some nations grow rapidly while others stagnate. 13

BASIC CONCEPTS
Every economy faces three fundamental questions in its functioning. These are: What goods and services are to produce and in what quantity? How to produce those goods and services? i.e., how the scarce resources are optimally allocated? How the goods and services so produced are distributed among the households? The nature of an economic system depends on how the above questions are resolved and who coordinates the decisions of millions of economic agents. At the two extremes are the Market and Command Economies. In between lies the widely prevalent Mixed Economy, which is a mixed of command and Market Economies. 14

TYPES OF ECONOMY
Market Economy: In a market economy, demand determines what goods and services are to be produced and how much of each good and services to be produced. Consumers are assumed to act in a rational manner so as to maximize their economic welfare. They spend their income on various products in such a way so as to maximize their economic welfare. Demand as given condition, the firms decide how to produce the required goods and services in a most efficient manner so as to maximize their profits. This results in optimum allocation of scarce resources. After that, the firms finalized that how the goods and services are distributed for resolving the ownership pattern of factor inputs and factor prices. 15

TYPES OF ECONOMY
Command Economy: A command mechanism is a method of determining what, how, when, where and for whom goods and services are produced, using a hierarchical organization structure in which people carry out the instructions given to them. The best example of a hierarchical organization structure is the military in India. Commanders make decisions requiring actions that are passed down a chain of command. Soldiers and mariners on the front line take the actions they are ordered. The examples of command economies are the former Soviet Union and the former communist nations of Eastern Europe. A command economy differs from a market economy in 16 two important ways.

TYPES OF ECONOMY
Firstly, in a command economy the state owns all the productive resources, like land, factories, financial institutions, retail stores, and the bulk of the housing stock. Government enterprises and government ownership of resources are the rule rather than the exception in a command economy. Secondly, in a command economy, authoritarian methods are used to determined resource use and prices. A centrally planned economy is one in which politically appointed committees plan production by setting target outputs for factory and enterprise managers are manage the economy to achieve political objectives. 17

TYPES OF ECONOMY
Mixed Economy: Most of the real world economies are mixed economy. It is an economy that follows both the market and command mechanism. In most of the modern countries, governments control many resources and criteria other than personal gain and business profit are used to decide how resources will be employed. Most of modern nations have a government firms as well as private enterprises to provide goods and services for the country. In such a country, government provides roads, defense, pensions and sometimes education. In modern mixed economies, governments intervene the markets to control prices and correct the shortcomings of a system in which prices and the pursuit of personal gain influence resource use and incomes. 18

BASIC MICROECONOMICS
BASIC CONCEPTS AND PRINCIPLES OF MICRO-ECONOMIC MICROANALYSIS

Managerial economics deals with firms, more especially with the environment in which firms operate, the decisions they take and the effects of such decisions on themselves and their stakeholders like customers, competitors, employees and the society in which they operate. The key economic concepts and principles that constitute the broad framework of managerial economics are explained in the next slides.
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BASIC MICROECONOMICS
MARGINALISM The root cause of all economic problems is scarcity. So, all should be careful about the utilization of each and every additional unit of resources. In order to decide whether to use an additional unit of resource you need to know the additional output expected there from. Economists use the term marginal for such additional magnitude of output. Marginalism concept will help to know the additional output expected from an additional unit of resource. Therefore, marginal output of labor is the output produced by the last unit of labor. 20

BASIC MICROECONOMICS OPPORTUNITY COST

Economic decision is choosing the best alternative among available alternatives. Before choosing best alternative you rank them all based on their priority and probable return. This choice implies sacrificing the other alternatives. The cost of this choice can be evaluated in terms of the sacrificed alternatives. If the best alternative was not chosen then you could have chosen the second best alternative. So, the cost of this particular best choice is the benefit of the next best alternative foregone. This is called Opportunity Cost. 21

BASIC MICROECONOMICS
DISCOUNTING TIME PERSPECTIVE Discounting principle refers to time value of money, i.e., the fact that the value of money depreciates with time. The core discounting principle is that a rupee in hand today is worth more than a rupee received tomorrow. One rationale of discounting is uncertainty about tomorrow, i.e., future. Even if there is no uncertainty, it is necessary to discount future rupee to make it equivalent to current day rupee. In business situations, most of the decisions relate to outflow and inflow of money and resources that take place at different point of time. Most outflows normally occur in the current period, whereas inflows occur only in future, therefore, in order to take the right decision it is necessary to discount future inflows to their present value level. The simple formula for discounting is: PVF = 1 / (1+rn), Where PVF = present value of fund, n= period 22 (year, etc.) and r = rate of discount.

BASIC MICROECONOMICS
RISK AND UNCERTAINTY The uncertainty is due to unpredictable changes in the business cycle, structure of the economy and government policies. This means that the management must assume the risk of making decisions for their organizations in uncertain and unknown economic conditions in the future. Firms may be uncertain about production, market-prices, strategies of rivals, etc. Under uncertain situation, the consequences of an action are not known immediately for certain. Economic theory generally assumes that the firm has perfect knowledge of its costs and demand relationships and its environment. 23

BASIC MICROECONOMICS
Uncertainty is not allowed to affect the decisions. Uncertainty arises because producers simply cannot foresee the dynamic changes in the economy and hence, cost and revenue data of their firms with reasonable accuracy. Dynamic changes are external to the firm and they are beyond the control of the firm. The result is that the risk from unexpected changes in a firms cost and revenue cannot be estimated and therefore the risk from such changes cannot be insured. The managerial economists have tried to take account of uncertainty with the help of subjective probability. The probabilistic treatment of uncertainty requires formulation of definite subjective expectations about cost, revenue and the environment. 24

DEMAND ANALYSIS DEMAND The amount of good that a consumer is willing to buy and able to purchase over a period of time, at a certain price is known as the quantity demanded of that good. The quantity desired to be purchased may be different from the quantity of good actually bought by the consumer. Quantity demanded is a flow concept, so the relevant time dimension has to be mentioned which will indicate the quantity demanded per unit of time. DEMAND FUNCTION Demand is a relationship between the price and the quantity demanded, other things remaining the same. If X1 denotes the quantity demanded and P1 its price per unit of the good, then other things remaining constant, the demand function is; X1 = f (P1). 25

DEMAND ANALYSIS Which shows that quantity demanded depends on the price. This means that any change in price will result in a corresponding change in the quantity demanded. DETERMINANTS OF DEMAND The determinants of demand for a product and the nature of relationship between demand and its determinants are very important factors for analyzing and estimating demand for the product. The most important determinants are as follows: Price of the product. Price of the related goods Complements and Supplements. Level of consumers' income. Customers' taste and preference. 26 Advertisement of the product.

DEMAND ANALYSIS Consumers' expectations about future price and Supply position. Demonstration effect and 'Band-Wagon' effect. Consumer-credit facility. Population of the country (Goods for mass consumption). Distribution pattern of the National Income. LAW OF DEMAND The law of demand states that other things being constant, price and quantity demanded have an inverse relationship; i.e. as price of a product increases quantity demanded decreases and vice versa. This law states that there is an inverse relationship between price and quantity demanded, as price increases, quantity demanded will decrease. 27

DEMAND ANALYSIS The law of demand can be explained in terms of substitution and income effects resulting from price changes. The substitution effect reflects changing opportunity costs. When price of good increases, its opportunity cost in terms of other goods is also increases. Consequently, consumers may substitute other goods for the good that has become more expensive. EXCEPTIONS TO THE LAW OF DEMAND Though normally law of demand applies to all situations, but there are few cases where the law does not hold goods, therefore these are regarded as exceptions to the law. These are the goods which are demanded less at low price and more at high price. Let us discuss some such exceptions here. 28

DEMAND ANALYSIS GIFFEN GOODS The case of Giffen Goods needs a little bit of story telling! In early Ireland it was observed that the poor population consumed two goods: meat (which was costly) and bread (which was cheap). A very strange phenomenon was observed when the price of the bread was increased, it made a large drain on the resources of the poor people and raised their marginal utility of money to such an extent that they were forced to curtail there consumption of meat and buy more of bread, which was still the cheapest food. This implied that quantity demand of bread (an inferior good) increased with the increase in its price. Sir Robert Giffin, an economist, was the first to give an 29 explanation to this situation.

DEMAND ANALYSIS Hence such goods which display direct price demand relationship are called Giffin Goods. These goods are considered inferior by the consumer, but they occupy a significant place in the individuals consumption basket. It so happens that people in this case, with the rise of price of this good (say rice), are forced to reduce their purchase of other expensive goods (say, chicken) and increase the purchase of that good (rice) in larger quantity to supplement the reduction in luxury food item (chicken). These goods categorically are those on which major portion of consumers income is spent, hence they are termed as inferior. 30

DEMAND ANALYSIS SNOB APPEAL Opposite to Giffen Goods, there are certain goods which have snob value, for which the consumer measures the satisfaction derived from there commodities not by their utility value, but by their social status. The consumer of this particular commodity wants to show it off to others, and as a result they buy less of it at lower prices and more at higher prices. Thus in this case, price and quantity move in the same direction. Diamond or antique works of art, latest model of mobile phones, sports cars, and designer clothes are example of such goods. Higher is the price of diamond, higher is the snob value attached to it and higher is its demand. These goods are sometimes also known as Vevlen Goods 31 after the economist Thorstein Vevlen.

DEMAND ANALYSIS
SHIFT OF DEMAND V/S EXPANSION OR CONTRACTION OF DEMAND

EXPANSION OR CONTRACTION OF DEMAND

Demand curve shows the relationship between price of a commodity and demand at that price, ceteris paribus. If the price changes, the demand will also change along the same demand curve. Thus movement along the same demand curve is known as a contraction or expansion in quantity demanded, which occurs due to rise or fall in price of the commodity.
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DEMAND ANALYSIS
EXPANSION OR CONTRACTION OF DEMAND

Movement from A to B: Expansion of demand Movement from B to A: Contraction of demand

Price D

P1

P2

D O Q1 Q2 Quantity

Expansion or Contraction of Demand

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DEMAND ANALYSIS
SHIFT OF DEMAND V/S EXPANSION OR CONTRACTION OF DEMAND

SHIFT OF DEMAND When price of a good remain the same but any one of the other determinants changed then we will get a new demand curve. So, when demand increases without any change in price of that good, the demand curve will shift to the right and with a reduction in demand, the demand curve will shift to the left.

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DEMAND ANALYSIS
SHIFT OF DEMAND
Price D D1 Right ward shift of demand D2

D2 D1 O D

Left ward shift of demand

Quantity

SHIFT IN DEMAND

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DEMAND ANALYSIS
Elasticity of Demand Law of demand gives us the direction of change in demand if the price of the product changes. But this information is not of much practical use since we know only the direction of change in the demand for a given change in the price. For decision making, we need the magnitude of this demand and elasticity of demand can gives this changes. The elasticity of demand helps to understand the extent to which the quantity demanded will rise (fall) due to fall (rise) in the price of the same good or a related good or due to rise (fall) in the income of the consumer. This involves an analysis of demand sensitivity with respect to prices of goods and income which helps the business to 36 forecast market trends for the future.

DEMAND ANALYSIS
TYPES OF ELASTICITY There are many types of elasticity but the main and important types are as follows. i) Price elasticity of demand ii) Income Elasticity of Demand iii) The Cross-price Elasticity of demand iv) Advertising Elasticity of Demand
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DEMAND ANALYSIS
PRICE ELASTICITY OF DEMAND (ep) ep = percentage change in quantity demanded resulting from one percent change in the price of the good, other things remaining constant. ep = Percentage change in quantity demanded / Percentage change in price Percentage change in quantity demanded = [change in quantity demanded / original quantity demanded] * 100 Percentage change in price = [change in price / original price] *100 Combining the two, we have, ep = [Q / P] * [P / Q], Where, Q = Infinitesimal change in quantity, P = Infinitesimal change in price, P = original price and Q = original quantity demanded of the good. 38

DEMAND ANALYSIS
SOME IMPORTANT CONCEPTS Perfectly elastic demand: A very small amount of change in the price will result in a change in the quantity demanded to the extent of infinity. Ep = . Perfectly inelastic demand: A change in price, however large it may be, causes no change in quantity demanded. Ep = 0. Unit elasticity of demand: When a given change in the price causes an equally proportionate change in the quantity demanded the value of price elasticity of demand id unitary. Ep = 1. Relatively elastic demand: Here a change in the price results in more than proportionate change in the quantity demanded. Ep > 1. Relatively inelastic demand: Here a change in the price results in less than proportionate change in the quantity 39 demanded. Ep < 1.

DEMAND ANALYSIS
Perfectly Elastic Relatively Elastic Unitary Elastic Relatively Elastic Perfectly Inelastic % P=0 % Q>% P % Q=% P % Q<% P % Q=0 Ep = . Ep > 1. Ep = 1. Ep < 1. Ep = 0.
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DEMAND ANALYSIS
INCOME ELASTICITY OF DEMAND It is defined as the proportionate change in the quantity demanded resulting from a proportionate change in income. Ey = [Q / Q] / [Y / Y] = [Q / Y] * [Y / Q] It is clear that the sign of the elasticity depends on the sign of the derivative Q / Y as both of the expressions Q and Y are positive, i.e., Q>0 & Y>0. The income elasticity is positive for normal goods. A commodity is considered to be a 'luxury' if its income elasticity is greater than unity. A commodity is considered to be a 'necessity' if its income elasticity is less than unity. The main determinants of income elasticity are: The nature of the need that the commodity covers: the percentage of income spent on food declines as income increases. The initial level of income of a country: for example, a TV set is a 'luxury' in an underdeveloped and poor country, while it is a 'necessity' in a country with per-capita income. The time period: consumption patterns adjust with a time lag to 41 changes in income.

DEMAND ANALYSIS
THE CROSS-PRICE ELASTICITY OF DEMAND The cross-price elasticity of demand is defined as the proportionate change in the quantity demanded of product i resulting from a proportionate change in the price of the product j. Symbolically the cross-price elasticity is: Ecij = [Percentage change in the quantity demanded of the ith good / Percentage change in the price of the jth good] = [(Qi / Qi)*100] / [(Pj / Pj)*100] = [Qi / Pj] * [Pj / Qi], As price and quantity values cannot be negative terms, the sign of the cross price elasticity is determined by the sign of the derivative Qi / Pj. The sign of cross price elasticity is negative if i and j are complementary goods, and is positive if i and j are substitute goods. The higher the value of the cross-price elasticity the stronger will be the degree of substitutability or complementarities of i and j. The main determinant of the cross elasticity is the nature of the commodities relative to their uses. If two commodities can satisfy equally well the same need, the cross elasticity is high and vice versa. 42

DEMAND ANALYSIS
ADVERTISING ELASTICITY OF DEMAND It is defined as the rate of change in the quantity demanded of a good due to change in the advertisement expenditure of the product. Ey = [Q / Q] / [ADexp / ADexp] = [Q / ADexp] * [ADexp / Q] It measures the response of quantity demanded to change in the expenditure on advertisement. It has been seen that some goods are more responsive to advertising, i.e., cosmetics.
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DEMAND ANALYSIS
DEMAND FORECASTING There are so many methods for forecasting demand. Here we will discuss the main methods. Broadly they are divided into two groups: 1. Survey Methods. 2. Statistical Methods. 1. Survey Methods. Survey methods are generally used where the purpose is to make short-run forecast of demand. Under the survey methods there are two types of survey: i) Consumer Survey Methods Direct Interviews, and ii) Opinion Poll Methods i) Consumer Survey Methods Direct Interviews The customer survey method of demand forecasting involves of the potential consumers. It may be in the form of: Complete enumeration, Sample survey, 44 End-use method.

DEMAND ANALYSIS
a) Complete enumeration method By this method, almost all potential users of the product are contacted and are asked about their plan of purchasing the product in question. The quantities indicated by the consumers are added together to obtain the probable demand for the product. The main limitation of this method is that it can be used successfully only in case of those products whose consumers are concentrated in a certain region or locality. b) Sample survey In this method, only a few potential consumers and users selected from the relevant market through a sampling method are surveyed. Method of survey may be direct interview or mailed questionnaire to the sample-consumers. This method is generally used to estimate short-term demand from business firm, government department and agencies and also by the households who plan their future purchases. 45

DEMAND ANALYSIS c) End-use method This method of demand forecasting has a considerable theoretical and practical value, especially in forecasting demand for inputs. This method requires building up a schedule of probable aggregate future demand for inputs by consuming industries and various other sectors. This method has two exclusive advantages. First, it is possible to work out the future demand for an industrial product in considerable details by types and size. Second, in forecasting demand by this method, it is possible to trace and pinpoint at any time in future as to where and why the actual consumption has deviated from the estimated demand.
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DEMAND ANALYSIS
ii) Opinion Poll Methods The opinion poll methods aim at collecting opinions of those who are suppose to possess knowledge of the market, i.e., sales representatives, professional marketing experts and consultants. This method includes; Expert-opinion method. Delphi Method. Market studies and experiments. a) Expert-opinion method The estimates of demand can obtain from different regions are added up to get the overall probable demand for a product. The firms are not having this facility; gather similar information about the demand for their products through the professional markets experts or consultants, who can, through their experience and expertise, predict the future demand. This is called opinion poll method. 47

DEMAND ANALYSIS b) Delphi Method This method of demand forecasting is an extension of the simple expert opinion poll method. Under this method, the experts are provided information on estimates of forecasts of their experts along with the underlying assumptions. The experts may revise their own estimates in the light of forecasts constitutes the final forecast. c) Market studies and experiments It is an alternative method of collecting necessary information regarding demand is to carry out market studies and experiments on consumer's behavior under actual, though controlled, market conditions. This method is known in common parlance as market experiment method. 48

DEMAND ANALYSIS 2. Statistical Methods This method is utilizes historical (time-series) and data for estimating long-term demand. This method is considered superior techniques of demand forecasting for the following reasons: In this method, the elements of subjectivity are minimum. Method of estimation is scientific. Estimates are relatively more reliable. It involves smaller cost. Statistical methods of demand projection include the following techniques; Trend Projection Methods. Barometric Methods. 49 Econometric Method.

SUPPLY ANALYSIS
SUPPLY FUNCTION Supply of a good refers to the various quantities of the good which a seller is willing and able to sell at different prices in a given market, at a particular point of time, other things remaining the same. Supply is related to scarcity. It is only the scarce goods which have a supply price. On the other hand, goods which are available freely have no supply price, i.e., air is available freely and hence does not have supply price. The law of supply states that other things remaining the same, more of a good are supplied at a higher price and less of it is supplied at a lower price. The law of supply takes into account only the most important determinant of supply, viz., the price of the good. So, the supply function is; Sx = f(Px), other things remaining the same, where, Sx = Amount of good X supplied, Px = Price of good X. 50

SUPPLY ANALYSIS
FACTORS AFFECTING SUPPLY The followings are the major factors affecting the supply of the good; i) Price of the Good. ii) Prices of other goods. iii) Prices of factors of Production. iv) State of Technology.
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SUPPLY ANALYSIS
ELASTICITY OF SUPPLY Price Elasticity of Supply refers to the percentage change in quantity supplied due to one percentage change in the price of that good. Es = [Percentage change in quantity supplied / Percentage change in the price] = [Qs/Qs] / [P/P] = [Qs/P] * [P/Qs] Where, Qs = Original quantity supplied, P = Original price, Qs = Change in quantity supplied, P = Change in price.
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