Economics

Law of Supply: Determinants, Assumptions, Exceptions and Limitations

Supply is an important factor which determines the price of a commodity. It implies the quantity of a commodity or service offered for a sale at a particular price in a given market and a given time. While perishable goods like flowers, vegetables, milk etc have inelastic supply, durable goods like benches have elastic supply.

Determinants of Supply :

The supply of a good is determined by the following factors.
1) It depends on the price of the commodity.
2) It depends on the prices of its substitutes and complementary goods.
3) It is determined by the prices of factors of production.
4) It also depends on the state of Technology.
5) Supply is influenced by the aims of the firm. For example a firm producing medicines and rat poison, gives more importance to the production of medicines.
6) It also depends on the risk-taking and uncertainty bearing. If the firm is not ready to bear the risk, it will reduce the production of the goods

Supply schedule: Supply schedule represents the different quantities of a commodity offered at different prices. It denotes the direct relationship between the price and supply of a commodity. This is shown from the following table:

When price is $1, 10000 units of a commodity is supplied. When the price increases to $2, the quantity of supply increased to 20000 units. 30000 units of a commodity are supplied when price is $3. The supply curve is quite opposite to the demand curve.

Law of Supply : The law of supply denotes the functional relationship between price and quantity offered for sale. It can be stated as follows:

“Other things remaining the same, as the price rises, supply extends and as the price falls supply contracts”.

This law explains the direct relationship between price and quantity supplied of a commodity. More quantity of a commodity supplied at higher prices. More quantity of a commodity is supplied due to the following reasons.

1 ) The existing sellers offer more quantity of their commodity at higher prices.

2 When price increases new producers enter the industry.

3 ) Marginal sellers who do not sell at lower price begin to offer more units of a commodity at higher prices.

Assumptions of the Law of Supply:

The law of supply is based on the following assumptions

1. The methods of production employed in production must be same:

2. Cost of production must remain constant.

3. The prices of related goods remain unchanged.

4. The policy of government remains unchanged.

5. The total number of firms or sellers remain the same.

6. The conditions of Nature must not change.

7. There exists no speculation regarding the changes in price. All these assumptions come under the phrase “other things remaining the same“.

Exceptions and limitations of the Law of Supply:

The law supply has the following exceptions and limitations:

1. Expectations : If the sellers expect that the price increases in future, they hesitate to sell their commodities even at the existing prices. So they like to supply only less quantity at lower prices. This is an exception to the law of supply.

2. Supply of labour : The supply curve of labour is a backward bending curve. Some labourers get satisfaction with the earnings of minimum income. They continue to offer their services until they get that income. After that stage even though they were paid with higher wages, they hesitate to offer their services . As a result the supply curve of labour bends backwards.

3. Rare articles: The law of supply is not applicable in the case of rare articles. Especially this law is not applicable in the case of articles which can’t be reproduced.

Changes in supply : The supply curve changes with a change in the factors other than price. For example more units of a commodity are supplied when cost of production is less even though price remains unchanged. Similarly, when cost of production increases, less units of a commodity are supplied even though price remain unchanged. In such a condition we have to draw new supply curves. Supply curves drawn to the left of the initial supply curve denotes less quantity of goods offered for sale. This shown in the following diagram:

In this diagram quantity offered for sale is shown on OX axis. Price is shown in OY axis. SS is the initial supply curve. S1S1 is new supply curve. It indicates more supply of goods at the lower prices. The quantity supplied decreases to S2S2 due to a rise in the cost of production. Thus, changes in supply curve due to the factors other than price are shown by different curves.

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