Economic and Business Environment · Basics of Demand and Supply and Forms of Market Competition

Law of Supply and Elasticity of Supply Explained

Q: What is the law of supply?

The law of supply says that, other things remaining the same, the quantity supplied of a good rises when its price rises and falls when its price falls. Price and quantity supplied move in the same direction. This is why the supply curve slopes upward.

Q: What is the difference between a change in quantity supplied and a change in supply?

A change in quantity supplied is caused only by the good's own price and is a movement along the same curve. A change in supply is caused by other factors such as cost, technology or taxes and shifts the whole curve. Rightward is an increase and leftward is a decrease.

Q: What are the main causes of a shift in the supply curve?

The curve shifts when input costs, technology, taxes, subsidies, prices of related goods, the number of sellers or expectations change. Lower costs, better technology and subsidies shift it right. Higher costs and taxes shift it left.

Q: What are the types of elasticity of supply?

Supply can be elastic (Es > 1), unitary elastic (Es = 1), inelastic (Es < 1), perfectly inelastic (Es = 0) or perfectly elastic (Es = ∞). Perishable goods and goods with fixed capacity tend to be inelastic in the short run. Supply becomes more elastic as time allows output to adjust.

Q: What is the difference between demand and supply?

Demand is what buyers are willing and able to buy at various prices, while supply is what sellers are willing and able to offer. Demand has an inverse relationship with price and supply has a direct one. Their curves slope in opposite directions and meet at market equilibrium.

Updated 11 October 2026 · Fact-checked

Supply is the quantity of a good that sellers are willing and able to offer at each price in a given time. The law of supply says that, other things equal, a higher price means a larger quantity supplied. Elasticity of supply = % change in quantity supplied ÷ % change in price.

Understand Supply, Law of Supply and Elasticity of Supply

Supply means the quantity of a good that producers are ready and able to sell at a given price during a given period. Wanting to sell is not enough. The seller must also have the means to produce and deliver.

A supply schedule is a table showing the quantities a seller offers at different prices. A supply curve is the graph of that table. Price is on the vertical axis and quantity on the horizontal axis. The curve normally slopes upward from left to right.

The law of supply says: other things remaining the same, as the price of a good rises, the quantity supplied rises, and as price falls, quantity supplied falls. Why? A higher price means higher profit per unit, so producers gain from producing more. Also, producing more usually costs more per extra unit, so only a higher price makes it worthwhile. The usual assumptions are that input costs, technology, taxes and other prices stay unchanged.

Keep two ideas apart. A change in the good's own price causes a movement along the same curve. This is called extension (price rises) or contraction (price falls) of supply. A change in any other factor shifts the whole curve. A rightward shift is an increase in supply. A leftward shift is a decrease in supply. The main determinants of supply are: input prices, technology, taxes and subsidies, prices of related goods, number of sellers, producers' expectations about future prices, and natural conditions such as monsoon for farm goods.

Elasticity of supply measures how strongly quantity supplied responds to a change in price. If a small price rise leads to a big rise in quantity, supply is elastic. If quantity barely moves, supply is inelastic. Time matters. Supply is usually more elastic in the long run, because firms can add machines and capacity. Perishable goods and goods needing long production time have low elasticity.

Key rules to remember

Law of supply: Price ↑ → Quantity supplied ↑ (other things equal); Direct relationship. Own price change moves you along the curve.
Price elasticity of supply (percentage method): Es = (% change in quantity supplied) ÷ (% change in price); Es is normally positive because price and quantity supplied move together.
Percentage change: % change = (Change ÷ Original value) × 100; Use the original value as the base unless the question gives another method.
Elasticity by change in quantity and price: Es = (ΔQ ÷ Q) ÷ (ΔP ÷ P) = (ΔQ ÷ ΔP) × (P ÷ Q); Δ means change. P and Q are the original price and quantity.
Types of elasticity of supply: Es > 1 elastic; Es = 1 unitary; Es < 1 inelastic; Es = 0 perfectly inelastic; Es = ∞ perfectly elastic; A straight supply line through the origin has Es = 1 at every point.

How to solve Supply, Law of Supply and Elasticity of Supply questions

Use this method for theory questions and numerical questions on supply.

1Read the question and decide the type: define, explain, distinguish, show a shift, or calculate.
2For theory, define the term first in one sentence, then give the rule with its condition 'other things remaining the same'.
3If a schedule or curve is asked, draw or describe the table and the upward-sloping curve with price and quantity labelled.
4For change questions, ask: is the cause the good's own price? If yes, it is a movement along the curve. If any other factor, the curve shifts.
5For numericals, write the original and new price and quantity. Find the change in each.
6Convert each change to a percentage using the original value as the base.
7Divide % change in quantity by % change in price. Then classify the result as elastic, unitary or inelastic.
8Close with one line of meaning, for example 'supply is elastic because quantity changes proportionately more than price'.

Quickest way: Two-second check for movement versus shift, and elasticity

When to use it: Use this when you are short of time on a short note or a numerical.

Ask 'Did the good's own price change?' Yes means movement along the curve. No means a shift.
For a shift, name the factor and its direction: lower cost or better technology moves the curve right; higher cost or tax moves it left.
For elasticity, compute % ΔQ and % ΔP, then divide. Compare the answer with 1.
Check the sign and the size. If % ΔQ is larger than % ΔP, the answer must be above 1.
Write the type in words next to the number.

Common mistakes in Supply, Law of Supply and Elasticity of Supply

Calling a change caused by a tax or new technology a 'contraction' or 'extension' of supply.
Students mix up movement along the curve with a shift of the curve.
Fix: Only the good's own price causes extension or contraction. All other factors cause increase or decrease, that is a shift.
Drawing a downward-sloping supply curve.
Students copy the shape of the demand curve.
Fix: Supply has a direct relationship with price, so the curve slopes upward. Label axes every time.
Dividing the absolute change in quantity by the absolute change in price and calling it elasticity.
The word 'ratio' is remembered but not the need for percentages.
Fix: Convert both changes to percentages, or use (ΔQ ÷ ΔP) × (P ÷ Q).
Using the new value instead of the original value as the base for percentage change.
Students pick whichever number is written last.
Fix: Use the original price and original quantity as the base unless the question says otherwise.
Writing the law of supply without 'other things remaining the same'.
Students treat it as an unconditional statement.
Fix: Always state the assumption. Without it, a change in cost or technology would also affect quantity.
Listing the demand determinants in a supply answer.
Both topics are studied together, so lists get mixed.
Fix: Remember supply factors are on the producer side: costs, technology, taxes, subsidies, number of sellers and expectations.

Worked examples

Example 1

The price of a good rises from ₹20 to ₹25 per unit. Quantity supplied rises from 400 units to 500 units. Calculate the elasticity of supply and state its type.

Show the solution

Original price = ₹20, new price = ₹25. Change in price = ₹5.
% change in price = (5 ÷ 20) × 100 = 25%.
Original quantity = 400, new quantity = 500. Change in quantity = 100.
% change in quantity = (100 ÷ 400) × 100 = 25%.
Es = 25% ÷ 25% = 1.

Answer: Es = 1. Supply is unitary elastic, because quantity supplied changes in the same proportion as price.

Example 2

A cloth manufacturer in Surat supplies 2,000 metres at ₹100 per metre. After a rise in the price to ₹110, supply becomes 2,600 metres. Also, explain what happens to the supply curve if the government gives a subsidy on cotton. Calculate Es first.

Show the solution

Change in price = 110 − 100 = ₹10. % change in price = (10 ÷ 100) × 100 = 10%.
Change in quantity = 2,600 − 2,000 = 600 metres.
% change in quantity = (600 ÷ 2,000) × 100 = 30%.
Es = 30% ÷ 10% = 3, which is greater than 1, so supply is elastic.
A subsidy on cotton lowers the cost of production. At every price the manufacturer is willing to supply more.
This is a change in a factor other than the good's own price, so the whole supply curve shifts to the right. It is an increase in supply.

Answer: Es = 3, so supply is elastic. The cotton subsidy shifts the supply curve to the right, showing an increase in supply.

Exam tips

In Paper 3 Part A, short notes often ask for the law of supply with its assumptions, so always write 'other things remaining the same'.
Draw a small neat diagram with labelled axes (price on the vertical, quantity on the horizontal) and write the supply curve as S. A labelled diagram earns clear credit.
For 'difference between demand and supply', write in two columns of points: buyers versus sellers, downward versus upward curve, inverse versus direct relationship, and the determinants on each side.
Show every step in a numerical: the changes, the percentages and the final classification. Marks are given for method even if arithmetic slips.
Learn the five types of elasticity with one real example each, such as fresh vegetables for low elasticity and manufactured goods in the long run for high elasticity.

Practice questions from Basics of Demand and Supply and Forms of Market Competition

Supply, Law of Supply and Elasticity of Supply in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Supply, Law of Supply and Elasticity of Supply: frequently asked questions

What is the law of supply?

The law of supply says that, other things remaining the same, the quantity supplied of a good rises when its price rises and falls when its price falls. Price and quantity supplied move in the same direction. This is why the supply curve slopes upward.

What is the difference between a change in quantity supplied and a change in supply?

A change in quantity supplied is caused only by the good's own price and is a movement along the same curve. A change in supply is caused by other factors such as cost, technology or taxes and shifts the whole curve. Rightward is an increase and leftward is a decrease.

What are the main causes of a shift in the supply curve?

The curve shifts when input costs, technology, taxes, subsidies, prices of related goods, the number of sellers or expectations change. Lower costs, better technology and subsidies shift it right. Higher costs and taxes shift it left.

What are the types of elasticity of supply?

Supply can be elastic (Es > 1), unitary elastic (Es = 1), inelastic (Es < 1), perfectly inelastic (Es = 0) or perfectly elastic (Es = ∞). Perishable goods and goods with fixed capacity tend to be inelastic in the short run. Supply becomes more elastic as time allows output to adjust.

What is the difference between demand and supply?

Demand is what buyers are willing and able to buy at various prices, while supply is what sellers are willing and able to offer. Demand has an inverse relationship with price and supply has a direct one. Their curves slope in opposite directions and meet at market equilibrium.