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INTRODUCTION
Meaning of Supply: Supply means the quantities that a seller is willing and able to sell at different prices. It is obvious that if the price goes up, he will offer more for sale. But if the price goes down, he will be reluctant to sell and will offer to sell less. Supply thus varies with price. Just as we cannot speak of demand without reference to price and time, similarly we cannot speak of supply without reference to price and time. Supply is always at a price. The supply of any good may then be defined “as a schedule of respective quantities of the good which people are ready to offer for sale at all possible prices.” Just as demand implies willingness and ability to pay, in the same manner the phrase ‘ready to offer for sale’ in the definition of supply given above implies both willingness and ability to deliver the goods. The law of supply states that there is a direct relationship between the quantity supplied and price of a commodity. To point out, this is a very qualitative statement. However, markets for different commodities differ in ways we can’t even imagine. Interestingly, the concept of elasticity of supply handles all this with ease.
Elasticity of Supply
The elasticity of supply establishes a quantitative relationship between the supply of a commodity and its price. Hence, we can express the numeral change in supply with the change in the price of a commodity using the concept of elasticity. Note that elasticity can also be calculated with respect to the other determinants of supply. However, the major factor controlling the supply of a commodity is its price. Therefore, we generally talk about the price elasticity of supply. The price elasticity of supply is the ratio of the percentage change in the price to the percentage change in quantity supplied of a commodity.
OBJECTIVES
I. To identify the concepts of price elasticity of supply in economics II. To determine the trend and measures of elasticity of supply of milk and milk products.
MEASUREMENT
Proportionate Method: Refers to one of the important methods of measuring elasticity of supply. In this method, elasticity of supply can be calculated by dividing the percentage change in quantity supplied with the percentage change in price of a product. The formula used for calculating elasticity of supply through proportionate method is as follows: eS = Percentage change in quantity supplied/Percentage change in price Percentage change in quantity supplied = New quantity supplied (∆S)/Original quantity supplied (S) Percentage change in price = New price (∆P)/original Price (P) The symbolic representation of elasticity of supply is as follows: eS = ∆S/S : ∆P/P eS = ∆S/S * P/∆P eS = ∆S/∆P * P/S Change in quantity supplied (∆S) is the difference between the new quantity supplied (S) and original quantity supplied(S). It can be calculated by the following formula: ∆S = S1-S Similarly, change in price is the difference between the new price (P) and original price (P). It can be calculated by the following formula: ∆P = P1 – P For example, quantity supplied of a product increases from 1000 units to 1500 units and price changes from Rs. 50 to Rs. 55 per unit. In such a case, the elasticity of supply would be as follows: P1 = Rs. 55, P = Rs. 50, S1 = 1500 units, S = 1000 units Therefore, ∆S = S1 – S = 1500 – 1000 = 500 units and ∆P = P1 – P = Rs. 55 – Rs. 50 = Rs. 5eS = 500/5 * 50/1000 = 0.5 (less than unit)
According to this method, if the numerical value of elasticity of supply is more than one, it represents relatively elastic supply. On the other hand, if the numerical value of elasticity of supply is less than one, then the elasticity of supply would be relatively inelastic. Apart from this, if the numerical value of elasticity of supply is equal to one, it would represent unitary elastic supply.
ii. Relatively Elastic Supply: Refers to a condition when the proportionate change in the quantity supplied is more than proportionate change in the price of a product. In such a case, the numerical value of elasticity of supply is greater than one (eS>1) For example, if the quantity supplied increases by 30% with respect to 10% change in the price of a product, it is called relatively elastic supply. The concept of relatively elastic supply is explained with the help of an example. The quantity supplied and the price of product P is shown in Table- The supply curve for product P is shown in Figure- 16 In Figure-16, when the price of product P is Rs. 50, the quantity supplied is 30,000 Kgs. However, when the price increases to Rs. 51, supply reaches to 35,000. Similarly, when the price further increases to Rs. 52, the supply reduces to 40,000 Kgs. This shows that the change in price is only one rupee while the change in supply is 5,000. In other words, the proportionate change in quantity supplied is more than the proportionate change in the price of product P. Therefore, the supply of product P is highly elastic (eS>1).
PRICE (IN RUPEES) QUANTITY SUPPLIED (IN KGS)
iii. Relatively Inelastic Supply: Refers to a condition when the proportionate change in the quantity supplied is less than proportionate change in the price of a product. In such a case, the numerical value of elasticity of supply is less than one (eS<1). For instance, the elasticity of supply would be less than unit, if the quantity supplied increases by 20% with respect to 30% change in the price of a product. The quantity supplied and the price of product Z is shown in : The supply curve for product Z is shown in Figure-17: In Figure-17, when the price of product Z is Rs. 50, the quantity supplied is 30,000 Kgs. When price increases to Rs. 55, supply reaches to 31, 000. Similarly, when the price of product Z increases to Rs. 60, the supply increases to 32,000 Kgs. This shows that S change in price is five rupees while the change in supply is 1,000. In other words, the proportionate change in quantity supplied is less than the change in the price of product Z. Therefore, the supply of product Z is relatively inelastic (eS<1). PRICE (IN RUPEES) QUANTITY SUPPLIED (IN KGs) 50 30 55 31 60 32
v. Perfectly Inelastic Supply: Refers to a situation when the quantity supplied does not change with respect to proportionate change in price of a product. In such a case, the quantity supplied remains constant in all the instances of change in price. The numerical value of elasticity of supply is equal to zero. This situation is imaginary as there is no as such product whose Supply is perfectly inelastic. Therefore, this situation does not have any practical implication. The quantity supplied and the price of product R is shown in Table: The supply curve for product R is shown in Figure-19: Figure-19 shows that the supply of product R remains constant at 30,000 Kgs. However, the price changes from Rs. 50 to Rs. 60 at the same supply rate. Therefore, the supply of product X is perfectly inelastic (e = 0).
PRICE ( IN RUPEES) QUANTITY SUPPLIED( IN KGs)
Factors Determining Elasticity of Supply: The numerical value of elasticity of supply is different for different situations. The elasticity of supply is influenced by a number of factors. Some of the factors that determine the elasticity of supply are as follows: i. Nature of a Good: Acts as a major determinant that influence the elasticity of supply. Goods, such as antiques and old wines, cannot be reproduced in the same form; therefore, the supply of such goods remains constant. Similarly, in case of perishable goods such as vegetables, fruits, and other eatables, the supply would be inelastic. This is because the supply of perishable goods cannot be increased or decreased easily. On the contrary, in case of durable goods, such as furniture and electric appliances, the supply would be elastic as their supply can be increased or decreased quickly. ii. Production Technology: Refers to the level of technology that helps in determining the elasticity of supply. The supply of a good produced by using higher level technology is faster with respect to the change in its price. iii. Time Period: Affects the elasticity of supply to a larger extent. In short-run, elasticity of supply is low while in the long run elasticity of supply is more. Therefore, changes in prices do not affect the supply of a good immediately. If the price remains high for a longer period, only then suppliers prefer to increase the supply of product. iv. Scale of Production: Puts a significant impact on the elasticity of supply. In case of small-scale production of goods, the supply would be inelastic and vice versa. For example, if an organization has a large scale production of soaps, then an increase in the price of soaps would increase the supply of soaps without any time lag.
PRICE ELASTICITY OF SUPPLY OF MILK AND MILK PRODUCTS Introduction Of all milk and dairy products, fluid milk products are probably the most often discussed and analyzed, although cheese is a close second. The interest in the fluid products stems from several factors. There is a long historical record expounding the merits of milk and its products, not always from dairy cows, throughout the world. The significant role played by the fluid products in promoting health, especially of young children, is emphasized. So too is the importance of dairy products as sources of vitamins and minerals that support bone health. Taken together, one can appreciate how it is possible for many people to hold deep convictions about milk and its products. Milk and dairy products are often described as manufactured or processed products. It is the processed products, but not all of them, that are the “fluid” products considered in this study. Fluid Milk Products Our interest (and analysis) is focused on the fluid beverage milk products, not cream-based processed products such as half-and-half, sour creams, or yogurt. Figure 1 shows estimates of total beverage milk sales and selected individual milk category sales over the past several years. The data are defined in terms of pounds, a weight measure that can at times confuse those wishing to think in terms of volume, a more traditional way to think of liquids. Converting the weight to a liquid volume base, at least in an approximate fashion, is simple— divide the weight in pounds by 8.6 (see Appendix table 1).
Total sales have been relatively stable over the 1975- 2007 period at approximately 54 billion pounds. However, the sales trends of selected individual categories offer a different perspective that is shown clearly in Figure 1. Whole milk sales have been declining over the period while the reduced fat milk category sales (2%, 1%, and skim) have trended upward, with clear peaks for 2% and skim followed by declines. However, there have
elasticities for the three categories were - 2.317 for whole milk, - 0.624 for low-fat milk, and - 1.489 for skim milk. Expenditure elasticities were - 0.401, 0.011, and 0.412 respectively. The total milk price elasticity was smaller in magnitude, - 0.243, as was the expenditure elasticity estimate, 0.034. Estimates of the uncompensated price and expenditure elasticities derived from the censored trans log supply system. All own-price elasticities are negative and follow the theory of supply. Fluid milk own price elasticities ranged from −0.52 for reduced fat milk, −1. for flavored reduced fat milk, − 1.31 for whole milk, −1.42 for canned milk, −1.50 for buttermilk, −2.16 for flavored whole milk, to − 2.32 for other milk products. Nearly all of the own-price elasticities for fluid milk are above unity, which imply that a one percent change in price will have an impact larger than one percent on the quantity supplied of fluid milk.
Conclusions
Empirical estimates of supply elasticities are at the heart of market analyses of food products. Many studies have reported estimates of supply elasticities for fluid milk products but they have 20 generally been related to only a few product categories. In this study we have analyzed at- home consumption of seven different fluid milk products: whole milk, whole flavored milk, reduced fat milk, flavored reduced fat milk, buttermilk, canned milk, and all other fluid milk products. The Nielsen household home scan data used for the analysis highlighted zero purchases of product categories which could become an issue. A censored trans log supply system model was specified to address that particular issue and both demographic and economic variables were included. The model yields both compensated and uncompensated supply elasticity estimates. Our estimates of elasticities associated with the included demographic variables suggest that changes in those variables would produce only marginal changes in the aggregate supplies for the fluid milk products we have defined. Price and income are clearly the main drivers of changes in fluid milk supplies.
