Elasticity of Supply: How to Calculate Elasticity of Supply? and Factors Influencing Elasticity

What is Elasticity?
Elasticity refers to the adaptability of something to changes. It is the flexibility of something in response to changes in other circumstances or factors affecting its performance or existence.  

For example, the elasticity of underwear. 

The wear fits the body of certain fatness and dimensions. The grip of the elastic expands or contracts according to the dimensions and thickness of your waist or body. This ability to adapt to changes is called elasticity.

The performance of anything, whether a product or service, depends on many related circumstances or assumptions. If those circumstances or conditions change, the performance or efficiency of that product or service also gets affected. So, it is elastic to those situations.

Elasticity of Supply

Elasticity of supply is the responsiveness of supply to changes in the prices of those goods or services.

Suppliers generally increase their supplies when the price of their product increases and contract their supplies when prices decrease. Further, supplies are increased to meet increased demand, and vice versa. 

 

Elasticity of Supply is abbreviated as Es.

It is also known as price elasticity of supply (abbreviated as PES) whenever the supply is elastic to price changes.

How to Calculate Elasticity of Supply

Elasticity is measured in terms of the ratio of changes in prices. It is expressed as the ratio of the percentage change in quantity supplied to the percentage change in price.

PES or E_S   = (%change in supply quantity)/(%change in price), i.e., the percentage change in supply quantity is compared to the percentage change in price, and their ratio is known as the PES.

Example:

Suppose the price of potatoes increases from Rs.20 to Rs.25 a kg and the resulting supply increases to 1000 kg from the previous supply of 500 kg. 

Now, the elasticity in supply is calculated as follows:
PES = {(1000 - 500) / 500 x100} ÷  {(25 - 20) / 20 x 100} = {(500/500) x 100} ÷ {(5/20) x 100} 
So percentage change in supply = 100 and percentage supply in price = 25
So PES = 100 ÷ 25 = 4

There are 4 kinds of elasticity in supply.

• If the increase in supply is greater than the increase in prices, it is known as high elasticity of supply. (It is always greater than one (PES > 1)).
• If the increase in supply is very small compared with the increase in prices, it is known as low elasticity of supply. (It is always less than one (PES < 1)).
• If there is no change in the quantity supplied despite an increase in prices, that condition is termed non-elasticity of supply. (The ratio is always zero (PES = 0)).
• When the percentage changes in price and supply are equal, it is known as unitary elasticity. (PES = 1) 

Factors Influencing Elasticity of Supply

There are many factors influencing elasticity of supply. Some of them are narrated below.

• Ability: Your ability to switch over to the production of those affected goods: If you can produce the increased-price commodities, you can supply more quantities immediately.
• Time factor: The availability of time for producing those goods or procuring them from other places can also influence the supply of those goods.
• Availability of resources and factors of production: If all the factors of production are easily available to produce that commodity, you can increase the supply easily.
• Nature of commodities: Perishable goods are more elastic as compared to durable goods because of their preservation and maintenance from rot and destruction. 
• Transportation facilities or mobility: If you are able to transport or move the goods easily, you can increase their supply drastically.

Supply and Demand and Factors Affecting Supply and Demand

Supply and Demand are the two major forces influencing the markets and economic conditions of any country. The whole economy is based on the interactions of these two major factors. They are closely interrelated with one another, and changes in one can drastically influence the other.

Supply and Demand: Meaning and Significance

Supply and demand denote the activities of producing or procuring goods or services and making them available to the market for sale on one hand, and the requirements or demands placed by potential buyers of those goods and services on the other hand. Each demand requires a supply, and each supply should find a demand. This chain of supply and demand is a never-ending process that determines market conditions at any particular place or time.

Understanding Supply and Demand
As you already know, supply is the quantity available in the market at a particular price that buyers may be willing to pay.

But, normally, any stock of goods in a market can be considered as supply, regardless of their price variations and quality variations. This is because they are potentially saleable at any time.

Demand refers to the want of customers who are intending to buy goods. They have the money and want to buy goods using that money.

Definition of Supply

Economically, supply can be defined as the quantity of any product that a seller offers for sale at a particular price at a particular time or within a given period of time. 

So, it is not the simple availability of commodities but the willingness of suppliers to sell that matters. If a supplier is not willing to sell his product, it can't be treated as an available supply.

Factors Influencing Supply

Some of the important factors affecting supply are as follows:

• Price: It is an important factor that influences the quantity supplied in any market. Producers of goods and services often try to sell their products at the highest possible prices, and they tend to increase supply when prices are high and reduce it when prices are low. This may sometimes lead to hoarding and black marketeering of goods, which will be discussed later.
• Cost of Inputs: is also a major deciding factor in determining the supplies available at any point in time or place. If the cost of inputs in producing the goods is low, they will be produced in large quantities. As a result, supplies will also increase drastically. Otherwise, when inputs are expensive, production and supply will be lower.
• Prices of Related Goods: can also affect the supply of a particular good. If the supplier deals in two or more goods and finds out that certain other goods he is dealing with are more profitable, then he may reduce the supply of the less profitable item and increase the supply of more profitable items to earn more income.
• Demand also controls supplies. Excessive demand will automatically require more and more supply. If there is a decrease in demand, naturally, the supply of that good will get restricted or decreased.
• Competition in markets influences your supplies. When there are many choices of alternative goods that satisfy the same need, buyers can shift to low-priced goods, and your goods will not be demanded. So, you will be forced to decrease your supply.
• Tastes and Likes: of consumers or potential buyers can also influence the supply of goods and services. If people like a particular product or brand and are willing to pay more to obtain it, then the supply of that product needs to be increased in the markets to meet their requirements. So, consumers' tastes and preferences will definitely give rise to more supply of those products in the market.
• Technology also plays some role in determining the supply. Use of advanced technology in production methods facilitates increased production at reduced costs and thereby makes more supply available at reasonable prices.
• Government interference can also affect supply to a large extent. Government policies may restrict production and supply of certain products by banning those items or imposing heavy duties and taxes.

Demand 

Demand occurs whenever a need is felt for procuring goods or services. Wants create demand, and you try to satisfy those wants by procuring goods and services.

But you should note that every want may not necessarily create demand. It depends on some circumstances.

Definition of Demand

Demand can be defined as the quantity of products demanded and bought by customers or potential buyers at a particular price through a given period. It is the demand backed by the purchasing power of the person demanding it. A simple want or desire is not a demand.

Factors Affecting Demand

Some of the important factors influencing demand are discussed below.

• Abundance: Certain varieties of goods and services can stimulate demand if they are available in abundance as compared to those in short supply. For example, if you put up stalls at roadside or at exhibition grounds, people will flock in to buy the goods.
• Price Factor: Price controls demand for goods. Cheaper goods attract more demand as compared to highly priced goods and services.
• Changes in Tastes: One's taste in goods can shift the demand from one type of good to another one.
• Prices of Related Goods: Substitutes and complementary goods can affect the demand for original goods or services. You can easily shift to cheaper substitutes or quality goods.
• Advertisement and Media: Product advertisements and articles can inspire changes in consumer behaviour and thereby shift in demand.
• Income of Consumers: The potential customer's income plays a good role in controlling their demand for goods as they have to adjust their consumption according to their income.
• Climate conditions or seasonal changes also affect demand. During summer, people like to wear cotton clothes, whereas in winter they need woollen clothes. Demand for raincoats and umbrellas can increase too much.
• Economic instability of the country can also lead to many deviations in demand for goods due to fear of price rises or short supplies.
• An increase in population can also affect demand as there will be more buyers for the same quantity of supply.

Definition of market | Market Creation | Factors influencing Market

What is Market?
Normally people use the word 'Market' to refer to a physical place of shops where goods are bought and sold. You will say "I am going to the market" to tell that you are going to buy some grocery or goods at a particular place.

Other words that come to mind immediately may be world market, stock market and supermarket.

But, in economics, market is a much wider term which includes the whole lot of suppliers and buyers of goods and services doing business either offline or online with no physical contacts and so, it is not limited to any particular area. Due to this fact, a market can be defined to include or refer to the whole lot of interactions between potential suppliers and buyers of goods and services spread all over the world either online or offline.

Definition of market
A physical or nominal place where buyers and sellers interact to trade in goods or services for money or value of money and where the forces of supply and demand operate.

Need for Market
Goods and resources are of numerous types and every person can not have all his requirements at hand. He needs to procure his requirements from different places and from different people as he himself can't produce everything that he needs. So different sections of people indulged in producing different kinds of goods and services which they could easily do. Then they exchanged those things with one another to satisfy their needs. This gave birth to markets through which they interacted and indulged in supply and consumption of those goods and services through the medium of currency.

In primitive days, people used to exchange goods and services as such through a system known as barter system. But, gradually, they learnt about money and money value. Then, they started pricing goods and services in terms of money and began trading their goods and services in lieu of money or money value. They met at some fixed places and transacted their businesses. Thus markets came into being..

Market creation

Market gets created whenever two or more people get involved in buying and selling or interacting with goods and services.

For any market, the basic requirement is supply and demand. There should be supply of goods and services. And there needs to be some demand for those goods. Simple supply without demand does not make market. Nor mere demand without supply can create market. If there is nobody to buy your goods, it does not make any sense as there is no market creation for your stock. Similarly, you want or demand something. But nobody is there to supply you with your requirements. So, no market is available for you.

So, it is a primary condition that market needs both supply and demand for goods or services. When there are both buyers and sellers, market gets created. So, it is inherent that stock should be there to create demand and demand should be there to create stock. When both aspects are present, market gets created. Further, the knowledge about commodity should also be there so that buyers can demand it or a supplier can supply it.

Three basic requirements for market

From the above facts, you are able to see that to create a market, we requires these three fundamental features or basic requirements:

• A market needs a commodity or stock to deal with.
• Presence of buyers and sellers is essential for market.
• Knowledge or awareness about the commodity should be there.

There is no need for physical presence of buyers and sellers at a particular place of the market. They can transact their business through online or mobile or through agents also. The basic requirement for market is a transaction between the buyer and the seller. The seller provides goods or services and the buyer purchases it by paying through cash or cheque or through any other means.

Now, coming to factors influencing market or the market conditions, there are many factors that govern market conditions and operations. Let us look at some of these factors that influence and govern markets.

Factors influencing market

Availability of resources and free trade facilities
A market implies meeting demands with supplies. So there should be enough stock of goods and resources for any market. The resources may be either raw materials being converted into goods or ready made goods imported from other places. So, the quantum of resources and supplies available makes your market sound or weak. Free flow of goods from one region to another region or one country to another without barriers makes markets strong.

Supply and demand
Supply and demand are most effective tools impacting market operations. Excessive supply or short supply and increased demand or decrease in demand can drastically change your market operations and equilibrium.

Political atmosphere
The political environment affects market conditions drastically. If there is political instability, the markets will be dwindling every moment in fear of unexpected revolts and disturbances.

Economic breakdowns
If the economy of the country is poor or disturbed, the markets will dwindle leading to unhealthy practices and corruption in dealings.

Natural calamities
Natural calamities like floods and drought can substantively disrupt and dwindle market conditions by destabilising the forces of supply and demand.

Government interference 
Government interference and restrictions affect the market atmosphere. Excessive controls or too much leniency can throw much influence on the operations of the market making it restricted market or free market.

Classification of Markets into Structure-Based and Nature-of-Activity-Based

Structure of Market: What Does Structure Mean?

By structure, we mean the interconnected characteristics such as the number of buyers and sellers, the volume of transactions, the degree of collusion, or secret and illegal understandings or obligations between them, the level of competition, and the barriers to Entry or Exit into business. All these things constitute the structure of any market.

So, when we take into account all the above qualities of a market structure, we can arrive at Four Major Forms of Market Structures.

Four Types of Markets Based on Their Structure

• Monopoly market, which is also known as a controlled or Command Market System 
• Oligopoly market (where a small group of firms dominates and controls the entire market)
• Perfect competition market, also known as a free market system.
• Monopsony market

Now, let me explain each and every form of it.

1) Monopoly Market
A monopoly is a market condition where only one seller controls the whole market in his field. As there is no immediate substitute for his product, the buyers have to depend on his firm for that particular product, and thereby, he can charge a higher price for his products and earn excessive profits. There is no competition at all for his business.

The salient features of a monopoly market are that it has a single supplier, no competition in market, no substitute for the product, he is sole price maker and profit is the motive.

But, in present conditions, there are few cases of monopolistic markets as governments normally do not allow monopoly practices.

The only cases of monopoly that we can find at present are the government's own tradings in some essential services like power, fuel, water, defence and banking sectors. But, governments generally act in the interests of public and so we cannot find any harm in their monopolistic activities.

2) Oligopoly market
Oligopoly is a situation where the market is controlled by a small group of persons or firms. The firms are able to control the maximum share of business in their field.

Some examples of oligopoly are the mobile phone market, steel, automobiles and gas agencies. They control the whole market and are able to set their prices high.

Important characteristics of oligopoly market are profit maximisation, price fixing, few firms and few competition, interdependence, full knowledge of other firm's activities, long life of firms and abnormal profits.


3) Perfect competition market
A perfect competition market is a situation where there are infinite number of sellers and buyers dealing in identical products with no control over prices and other market conditions. The prices are reached automatically through interaction of supply demand forces and with some intervention of government policies to fix minimum support prices.

The characteristics of perfect market conditions are that there are unlimited sellers and buyers, no barriers for entry or exit, homogeneous products which are perfect substitutes for each other, each seller can maximise his profit, perfect mobility of factors of production, zero cost transactions as you can make direct purchases, free decision making ability and perfect knowledge of goods, etc.

4) Monopsony market
A monopsony market structure is a situation where a single buyer (not the seller) controls the whole market. The buyer can force the price to decline by his actions of collective purchases and thereby can pose a threat to monopoly trade. A single buyer purchases all the produce direct from the sellers or producers at a lower price because of his influence in the market.


Various types of markets

Besides above classification which is based on the structure of market, we can identify or classify markets into various types according to the nature of goods or services it deals with or according to the place or limits within which it operates or on their volume of business, etc.

The following are some of these classifications or types of markets.

Based on Products

• Paddy market
• Vegetable market
• Cement market
• Oil market
• Clothes market
• Electronics market, etc.

Based on Services

• Financial/ Capital market
• Labour market
• IT market
• Share market
• Professional services, etc.

Based on place or boundaries

• Local market
• National market
• International market

Based on Volume

• Wholesale market
• Retail market

Based on real presence

• Physical / offline market
• Online market
• Future market (dealing in future transactions)

Wholesale market

A wholesale market is a place or system where goods are transacted in whole lots or larger quantities. The wholesaler procures goods direct from producer and sells them to retailers or other middle agents and institutions in whole lots. The wholesaler does not involve in small quantity dealings. He acts as the middleman between producer and consumer or retailer. The wholesale business facilitates manufacturers and producers of goods as they need not worry about sale of their produce and thereby concentrate on their business.

Retail market 

In retail market, the buyers and sellers meet physically. Retail market is a place where the buyer reaches seller physically and buys goods from his shop. For this reason, the retailer should locate his shop nearer to the buyer's location and keep the shop well maintained. The transactions are direct between buyer and seller in this system. So there is physical attachment between retailer and his customers. Thereby the retailer can develop good relations with his customers to keep them engaged with his shop.

Physical market

A physical market is a place where the buyer meets the seller and purchases things. Retail shops like small grocery stores, departmental stores and big shopping malls are all examples of physical market. A physical market can be also termed as offline market in contrast to an online market.

Online market

Nowadays, online shopping has become a trend in most cities. Online market is the system of buying goods using the internet through e commerce. In this system, the suppliers create a website placing all their products for display and sale online. The full details of the product along with its price and features are posted online with images of the products on sale. So any prospective buyer can land into their website, view those details and select their products and book orders. Payments are normally done through credit cards or debit cards and money transfers. Some sellers offer the facility of payment on receipt of product by the buyer.

Future market

A future market is a market wherein a customer can deal in future dealings. The buyer enters in a deal with the seller to buy certain goods or services at a certain specified price to be delivered to him at a future date. In these type of transactions, the buyers are protected from any abnormal changes in prices at that future period as they have already fixed the price with the seller. So, the buyers get relief from future price variations.

How to Prepare A Balance Sheet: Sample Balance Sheet

What is a Balance Sheet?

A Balance Sheet is one of the most important documents of any company. It is a summary of all the company's accounts and activities in monetary terms. It is a statement of an Organisation's assets and liabilities. It gives a complete picture of the financial position as on a particular date of the company in question, in a nutshell. 

Importance of Balance Sheet

Balance sheets are important for the many uses they provide to different sections of people. They are mandatory under the Company Law for any business organization.

Here are some of the advantages derived from Balance Sheets:

• Balance Sheets are used by governments and Company Law Boards to determine the performance and activities of companies and business entities for the purpose of Income Tax assessment, Corporate Tax, and other statutory compliance requirements. 
• Investors use information from Balance Sheets as a guide while investing their resources in the company. As the balance sheets are certified by licensed Chartered Accountants, they are deemed reliable sources in projecting a true picture of the company's financial position. 
• Owners and Shareholders use the balance sheets to understand the status of their company and to take authoritative decisions on management issues and running of the company.
• Even staff and workers should know the status and progress of their company to seek increments, promotions, and bonus payments. Even fresh applicants for a job should assess the company's financial status before applying for a job. 
• In the legal field, also. Balance sheets are used to file cases and seek compensation from the company. 

How to Prepare Balance Sheets

Balance Sheets are prepared using the Trial Balance and Profit and Loss Statement of the company.

• A simple Balance Sheet consists of two columns, just like the Trial Balance and Profit and Loss account.
• On your right side, you will show all the assets like Fixed Assets, Current Assets, Cash & Bank Balances, and Investments, etc.
• On the left side of the balance sheet, you will show all your liabilities such as Capital, long-term liabilities, current liabilities, etc.
• The order followed while showing assets, as to which item should appear first and which at the last, is based on their liquidity or non-liquidity nature. Hard assets which are not easily saleable are generally shown first, followed by the next hard item.
• For Liabilities, the order followed is based on the obligation of the liability to be met first while paying out.

But in my example below, I am providing a sample balance sheet in a simple format that I used to prepare for my company in a two-column statement.

Balance Sheet of XYZ Company as on 31^st March 2014

Liabilities	Amount ($)	Assets	Amount ($)
Authorised Capital CP shares 200000 Ordinary    50000 Total         250000 Issued & Paid-Up CP shares 180000 Ordinary     45000		Fixed Assets 200000
		Less: Depreciation                                                         30000	170000
		Inventories	80000
		Sundry Debtors	15000
		Prepaid expenses	5000
		Investments	5000
		Bank Balance	10000
Total Issued & Paid	225000	Cash Balance	2000
Long-term Liabilities	15000
Current Liabilities	30000
Cumulative Profit	17000
TOTAL	287000	TOTAL	287000

The above is only a sample for easy understanding of Balance Sheet preparation. All figures are to be taken from your Profit and Loss Statement and Trial Balance, as already mentioned.

You must attach to this Balance Sheet all the quantitative information and the details of each group of account shown here in the above statement. These sheets are to be enclosed as Annexures to the Balance Sheet.

Please Note:

Different countries follow different styles in presenting balance sheets. Some prefer a single-column statement that starts with assets, then proceeds to liabilities and capital. The asset total is inserted in the middle, and the liabilities total at the end. In any case, the totals for assets and liabilities will match. That is why it is known as a Balance Sheet.

Even in the same country, different companies can present their figures in different ways. For example, cash and bank balances and current assets may come first, followed by fixed assets. Current liabilities may come first, then long-term liabilities, and then share capital.

Manufacturing Account: How it Differs from A Trading Account

A manufacturing account is different from the trading account in the sense that it is uniquely designed for the manufacturing industries.

A manufacturing account is prepared to know the manufacturing cost of goods. This statement is generally prepared and used in manufacturing concerns to know the cost of production.

But a trading account is prepared in all business concerns, whether they are manufacturers or dealers in goods.

The trading account gives you the gross profit or loss of your business in selling your products. So it includes, for its cost, some elements of selling and stock-maintaining charges also in it. So, the trading cost is broader than the manufacturing cost.

In a Manufacturing Account Statement, you will consider only those expenses which are directly related to the manufacturing of your goods and only up to the production point.

So, it will not include the cost of maintaining your stocks in godowns or warehouses, or the cartage incurred in selling your products, and the wages of labour, etc., not directly related to production.

Manufacturing cost is carried on to the trading account to determine the gross profit or loss of your business concern. 

So, you can take the manufacturing cost directly in your trading account and add other expenses to calculate the gross profit instead of taking each item of cost separately in the trading account. 

For this, you will first calculate the manufacturing cost and then carry it to the Trading Account and add other items of trading activities one by one on the expenses side and deduct the total amount from the sales amount to arrive at the gross profit of your business.

A sample of Manufacturing Account and Trading Account are given below so that you can know the differences between those two statements.

Manufacturing Account for Cement Industry

Particulars	Amount in $
Limestone cost	100000
Gypsum	5000
Other ash, additives	15000
Crushing charges	10000
Direct labour	20000
Power	20000
Fuel	20000
Total manufacturing cost	190000

   

Trading Profit/Loss Account

Particulars	Amount ($)	Particulars	Amount ($)
Opening Stock	10000	Sales	280000
Manufacturing cost	190000	Closing Stock	20000
Wages & Salaries	20000
Rent and Electricity	10000
Cartage	10000
Depreciation	20000
Total Cost	260000
Trading Profit	40000
TOTAL	300000	TOTAL	300000

Trading Profit is the same as Gross Profit (before administration expenses and other costs)   

Summary:

From the above illustration, you can see that a Manufacturing Account is directly related to the calculation of the cost of goods produced up to the manufacturing stage only, whereas the trading account takes into account other costs also related to the trading or selling of goods, including the depreciation involved on plant and vehicles and storage building. 

Trading Account: A Comparison With Profit & Loss Account

A "Trading Account" in accounts is just like a profit and loss account with some deviations.

In a profit and loss account, we calculate the net profit or loss of a company, whereas in the trading account, we calculate the Trading Profit or Loss.

Due to this fact, the trading account is also known as the "trading profit and loss account".

Trading accounts are very useful for manufacturing units and trading units.

Significant Differences of Trading Account vs P&L Account 

• A trading account is prepared before the preparation of a Profit and Loss account.
• A trading account provides you with the actual profit or loss incurred in the product-related activities of your business (say, manufacturing and selling activities that are directly related to your product). It provides the gross profit or loss of your product.
• Expenses not directly related to the product are not considered in preparing this account. But a profit and loss statement considers all types of expenses for deducing the profit/loss.
• By preparing a trading account, you can assess whether your core business activities are fruitful or not. In other words, it tells you whether you are selling your product at a profit or a loss, before considering other administrative costs.
• You are able to know whether you are realizing the manufacturing cost/ trading cost of the product. 
• By studying the trading account, you can suitably control your expenses by locating where you are spending more money (whether it is raw materials, sales activities, tools and equipment, and other product-related costs).

How to Prepare Trading Account

 To prepare the trading account, you must first identify whatever expenses are directly related to your production or trading activity.

1. For Manufacturing Units:

Suppose you are producing cement. You will need limestone, gypsum, and some other additives for making it strong. Then you need coal for furnaces and power for running the machines to produce cement. 

So all the above-mentioned ingredients constitute the cost of producing your cement. 

Thereafter, include the direct wages paid to the labour involved in production operations as cost. 

You may include any other direct costs like rent or depreciation of the machinery which are directly related to production.

2. For Trading Businesses:

If you are dealing in buying and selling of products, your product cost will include the purchase price of goods, transportation charges incurred, and delivery charges (if you make home deliveries). 

Also include the Godown rent or shop rent, wages to labour, etc.

If you have to pack the goods while delivering, include the packaging charges also as a cost item.

So you are able to see that expenses directly related to your operations only are to be taken in this trading account to find out whether you are recovering the full cost of expenses or not from your sales.

Generally, your sale price will always be more than your actual product cost in this approach.
This is due to the fact that you will be including all your other overhead costs and your own profit element also while deciding your sale price. 

So, while comparing the trading account with the Profit and Loss Account, you should compare it with the Gross Profit. 

All overhead costs are taken in the final profit and loss statement to arrive at the net profit of your business as a whole.

Evidently, if your trading account is not showing a profit, it means that you are not recovering even the product cost.