Law of Supply

 

Introduction:

The law of supply states that, other things remaining the same, the quantity supplied of a commodity is directly or positively related to its price. In other words, when there is a rise in the price of a commodity the quantity supplied of it in the market increases and when there is a fall in the price of a commodity, its quantity supplied decreases, other things remaining the same. Thus, the supply curve of a commodity slopes upward from left to right.

Law of Supply Assumptions

The term “other things remaining the same” refers to the following assumptions in the law of supply:

1.     No change in the state of technology.

2.     No change in the price of factors of production.

3.     No change in the number of firms in the market.

4.     No change in the goals of the firm.

5.     No change in the seller’s expectations regarding future prices.

6.     No change in the tax and subsidy policy of the products.

7.     No change in the price of other goods.

The law of supply can be explained with the help of supply schedule and supply curve as explained below.

Supply Schedule

Supply Schedule is a tabular presentation of various combinations of price and quantity supplied by the seller or producer during a period of time. We can show the supply schedule through the following imaginary table.

The given schedule shows positive relationship between price and quantity supplied of a commodity. In the beginning, when the price is Rs.10 per kg, quantity supplied by the seller is 1kg. As the price increases from Rs.10 per kg to Rs.20 per kg and then to Rs.30 per kg, the quantity supplied by the seller also increases from 1 kg to 2 kg and then to 3 kg respectively.

Further rise in price to Rs.40 and then to Rs.50 per kg results in increase in quantity supplied by the seller to 4kg and then to 5kg. Thus, the above schedule shows that there is positive relationship in between price and quantity supplied of a commodity.

Supply curve

The supply curve is a graphical representation of a supply schedule. By plotting various combinations of price and quantity supplied of the table, we can derive an upward sloping demand curve as shown in the figure below:

In the given figure, price and quantity supplied are measured along the Y-axis and the X-axis respectively. By plotting various combinations of price and quantity supplied we derived points A, B, C, D, E curve and joining these points we find an upward sloping i.e. SS₁. The positive slope of the supply curve SS₁ establishes the law of supply and shows the positive relationship in between price and quantity supplied.

Exceptions and Limitations of the Law of Supply

a.      Auction Sale

The law of supply states that quantity supplied increases with increase in price and vice-versa. But this law doesn’t hold true in case of auction sale. An auction sale takes place at that time when the seller is in financial crisis and needs money at any cost.

b.     Price expectation of seller

If the seller expects that the price of commodity is going to fall in near future, he will try to sell more even if the price level is very low. On the other hand, if the seller expects further rise in price of the commodity he will not sell more even if the price level is high. It is against the law of supply.

c.      Stock clearance sale

When a seller wants to clear its old stock in order to store new goods, he may sell large quantity of goods at heavily discounted price. It is also against the law of supply.

d.     Fear of being out of fashion

As we know that quantity supplied of a commodity is affected by fashion, taste and preferences of the consumer, technology and time. If the seller thinks that the goods are going to be outdated in the near future, he sells more at a lower price which is also against the law of supply.

e.      Perishable goods

Those goods which have very short life-time and they become useless after that are all perishable goods. Those goods must be made available in the market at its right time whatever be its price. So the seller becomes ready to sell his goods at any offered price. It is also against the law of supply.

Adopted from: https://www.businesstopia.net/economics/micro/law-supply