Table of Contents
Law Of Supply
The law of supply states the direct (positive) relationship between price of the commodity and quantity supplied of a commodity , keeping other factors constant.
The law of supply refers to the direction in which quantity supplied changes with a change in price. There is an direct relationship between quantity supplied and its price.
Definition of Law Of Supply
According to Dooley-“The law of supply states that other things being equal the higher the price, the greater the quantity supplied or the lower the price, the smaller the quantity supplied.“
According to Lipsey- “The law of supply states that other things being equal, the quantity of any commodity that firms will produce and offer for sale is positively related to the commodity’s own price, rising when price rises and falling when price falls.“
Thus we can say that, Law of Supply-states that the higher the price, greater the quantity supplied or lower the price, lesser the quantity supplied of a commodity, other determinants of supply remaining constant;
Thus, the supply curve of a commodity slopes upward from left to right.
Assumptions of the law of supply
Law of Supply depends on the basic assumption ‘other things remaining the same’ (or ceteris paribus is a Latin phrase that generally means “ all other things being equal”) Now let us see what we include in this phrase’ ‘ other things remaining the same’ they are:-
- No change in the state of technology.
- No change in the price of factors of production.
- No change in the number of firms in the market.
- No change in the goals of the firm.
- No change in the seller’s expectations regarding future prices.
- No change in the tax and subsidy policy of the products.
- No change in the price of other goods.
- No change in the Transport and Communication Conditions
Law of supply can be explained with the help of example and diagram:-
From the schedule & figure we can explain the law of supply. The schedule reveals that the rise in price of the good from Re.10 to Rs. 20 leads to rise in the supply of the good from 100 units to 200 units respectively. The supply curve also depict that it has a positive slope which implies that the supply of the good rises due to the rise in its price.
Important facts about Law Of Supply
- Positive/Direct Relationship:
Law of Supply states the positive relationship between price of the commodity and quantity supplied of a commodity, assuming that no changes in other factors.
- Qualitative, not Quantitative:
Law of Supply makes a qualitative statement, as it indicates the direction of change in the quantity supplied, but it does not indicate the volume of change.
- No Proportional Relationship:
Law of Supply does not establish any proportional relationship between change in price and the resultant change in quantity supplied.
Law of supply is one sided as it only explains the effect of change in price on the quantity supplied.
Law of supply states nothing about the effect of change in quantity supplied on the price of the commodity.
Reasons for Law of Supply
Let us now try to understand, why the supply of a commodity expands as the price rises. The main reasons for operation of law of supply are:
- Profit Motive: The basic aim of producers, while supplying a commodity, is to secure maximum profits. When price of a commodity increases, without any change in costs, it raises their profits. So, producers increase the supply of the commodity by increasing the production. On the other hand, with fall in prices, supply also decreases as profit margin decreases at low prices.
- Change in Number of Firms: A rise in price induces the prospective producers to enter into the market to produce the given commodity so as to earn higher profits. Increase in number of firms raises the market supply. However, as the price starts falling, some firms which do not expect to earn any profits at a low price either stop the production or reduce it. It reduces the supply of the given commodity as the number of firms in the market decreases.
- Change in Stock: When the price of a good increases, the sellers are ready to supply more goods from their stocks. However, at a relatively lower price, the producers do not release big quantities from their stocks. They start increasing their inventories with a view that price may rise in near future.
Exceptions to the Law of Supply
There are some situations under which the law f supply does not operate. These situations may be treated as Exceptions to the Law of Supply. The important exceptions to the law of supply are-
- In the case of Agricultural Goods
- Future Expectations regarding prices
- Auction sales /Rare articles
- Backward countries
- Perishable Goods