The law of supply says that when the price of a commodity rises suppliers will be induced to earn profits by increasing the sale of the commodities. The supply curve is an upward sloping curve. It shows the positive relationship between goods supplied and price. The companies charge higher prices for their goods and services in order to earn higher revenue. Therefore the quantity supplied will increase.
The supply curve is upward sloping. But why ? Opportunity cost is the reason behind the upward slope of supply curve. Because when the price of goods and services rise, there is an incentive to produce more goods. The main objective of suppliers is to earn higher profits. Therefore the producer will invest more in profitable activities.
Law of Supply Definition
The law of supply states that by keeping the other factors constant, as the price of a good or service increases the quantity supplied by the sellers will also increase. As the price of goods or services decrease the quantity supplied by the sellers will also decrease.
The law of supply shows the behaviour of the producers when prices of goods and services change. When the price of the commodity increases the producer will increase the supply to earn higher profits. When the price of the commodity decreases the producer will decrease the supply to not lose the money.
By the diagram, SS is the supply curve. The quantity supplied is on the X-axis and the price of the commodity is on the Y-axis. We can see that when the price of the commodity rises the quantity supplied also rises. In the diagram, when price was , quantity supplied was 20 units. When the price increased to 2, the quantity supplied increased to 40 units.
The law of supply states that, keeping all factors constant, as the price of goods and services increase the quantity supplied will increase.
Supply is the amount of goods and services the producers are willing to offer to consumers at a given price level. There is a thin line of difference between supply and economic supply. When the price of products are low the supply is low. When the price of products are high the supply is high. Because, companies want to earn high profits. [Source- Britannica]
The assumptions of law of supply are as follows
- The law assumes that there is no change in the cost of production.
- There is no change in technology.
- Price of substitute commodities remains constant.
- The price of capital goods remains unchanged.
- The tax policy in the economy is constant.
Meaning of Supply
Before going into the concept of law of supply, let us see the aspects of supply first. There are three major aspects to supply that determines the actual meaning of the word.
- Supply is always referred in terms of price. The price of quantities supplied differ from one place to another.
- Supply is referred in terms of time. This refers to the amount of quantity the suppliers are willing to offer during a particular time period.
- Supply considers the stock and market price of the product. Supply is affected by both the stock and market price of the product. If the market price of the product is more than the cost price then the seller will increase the supply of the product.
Classification of Supply
The law of supply is a major concept of microeconomics. Supply is broadly classified under two heads. Supply is classified into individual supply and market supply.
Individual supply is the quantity of the goods and services the individual/single producer is willing to offer at a particular price level in a time period. The single producer is the single firm in the economy.
Market supply is the quantity of goods and services supplied by all the firms at a particular price and at a particular period of time. The other name of market supply is industry supply.
Supply vs Quantity Supplied
In economics, supply is very different from quantity supplied. Supply is the relationship between price and quantities supplied that can be pictured through a supply curve or a supply schedule. Whereas, quantity supplied refers to a certain point on the supply curve or one quantity on the supply schedule.
A supply curve is a graphical representation of the relationship between price and quantity. And a supply schedule is a table that shows the quantity supplied at different prices. The supply curve and the supply schedule shows the same information but in two different ways.
By the diagram we see the supply schedule on the left side and the supply curve on the right side. We see the same information but they are put forward in two different ways. The supply schedule shows that when price increases the quantity supplied also increases. Supply schedule is represented in the form of supply curve.
Supply refers to the supply curve. Quantity supplied refers to the specific point on the supply curve.
Types of Supply
There are five types of supply in economics. In this section of law of supply we will go through the types of supply.
Market supply is a very short period supply. It can also be called as daily supply or day to day supply in economics. The products that are supplied on a daily basis are fruits, vegetables, meat products etc. The supply in this case is met according to the availability of goods.
Short Term Supply
In the context of short term supply the demand of the goods and services are not met according to the customer demand. The demand is met according to the goods that are available for sale.
Long Term Supply
In the long run period, both the demand and supply of goods and services can be changed. Because for the long run, the demand for different goods and services can be met by producing/manufacturing the different products according to the demand of the customers.
The commodities supplied jointly or produced jointly is joint supply. An example of joint supply are cotton and seed, mutton and wool etc. In case of joint supply, one is the main product and the other is the by product. For example in the case of mutton and wool, when a sheep is slaughtered the main product is the meat i.e. mutton and the by product is wool.
Composite supply is the supply of commodities from various sources. An example of composite supply is light. We get light from different sources like kerosene, electricity, petrol, candles etc. Therefore all the resources here supply the same product which is light.
Factors affecting Law of Supply
Supply is the amount of goods and service the producer is offering at a given price level. He will supply more amounts of goods and services if the price of the commodities are high in the market. At the same time, he will offer less amount of goods and services in the market when the price of the commodities are low. The law of supply states that quantity supplied will be high when the price of the commodities are high. Because, traders want to earn higher profits. This is possible when the price of goods and services are high.
Now let us see the factors that affect the law of supply
Price affects Law of Supply
The major factor that affects supply of goods and services in the market is the price of the commodity. An increase in the price of goods and services in the economy will also increase the supply of the products in the market. As a result, profits earned by the firms in the market will also increase.
A decrease in the price of goods and services in the market will decrease the supply of products in the market. Therefore price plays a major role in the concept of law of supply.
Cost of Production
The increase in the prices of factors of production will increase the cost of production. Therefore, the firms will produce less quantities to avoid high cost of production. As a result the supply will be less in the economy.
When the cost of factors of production is less, the production of goods and services will be high. Therefore the supply of goods in the economy will rise. There is an inverse relationship between cost of production and supply. When the cost of production is high the supply is less. And when the cost of production is low the supply is high.
Natural conditions of the economy influence supply of commodities. An example of those commodities are the agricultural products. When the monsoon is in time the supply of agricultural products in the market is high and proper. But when the monsoon fails the supply of agricultural products in the market is low and the price is high as well.
Transport Cost affects the Law of Supply
When the transportation facilities in the economy are good the products are easily available in all parts of the economy. Therefore better quality of transport ensures better supply in the economy. Transport facilities are a major constraint to supply.
Taxation policy of the government affects law of supply. If the taxes levied on the goods and services are high the supply of goods and services will be low. When taxes levied by the government is low the supply of goods and services will be high.
Price of factors of production play a major role in affecting the law of supply. When the cost of factors of productions rise the cost of production will increase. As a result the supply of goods and services in the economy will decrease. Therefore, we can say the cost of factors of production/input prices play a major role in affecting the law of supply.
Supply Function and Law of Supply
Supply function is the mathematical expression of the law of supply in economics. In simple words, the supply function quantifies the relation between price of goods and services and the quantity supplied in the economy keeping the other factors constant.
The law of supply explains the relationship between price of the commodities and quantity supplied in the economy. At the same time, supply function is the measure of this relation between price and quantity supplied.
The supply function is expressed mathematically in terms of
Qs = f (Pa, Pb, Pc, T, Tp)
Qs = Quantity Supplied
Pa = Price of the commodity supplied
Pb = Price of other commodities
Pc = Price of inputs
T = Technology
Tp = Time period
The supply function explains that the quantity supplied is the function of price of commodities supplied, price of other commodities, input prices, technology and time period. These factors affect the law of supply.
The law of supply is the relation between quantity supplied and price. The supply function measures the relationship between price and quantity supplied.
Shift in Supply
A change in certain factors causes the shift in supply curve. The shift is according to the law of supply. The shift in supply curve is towards the right or left. When the supply curve shifts towards the right it indicates an increase in supply. But when the supply curve shifts towards the left it indicates a decrease in supply. Let us see the factors that cause a shift in the supply curve towards the right or left.
One of the important factors that causes a shift in the supply curve is natural conditions. Favourable natural conditions in the economy helps the supply of goods to increase, As a result the supply curve shifts towards the right. The economy that experiences less natural calamities is bound to progress. But when the natural conditions are not favourable it causes a decrease in supply of the agricultural products. The supply curve shifts towards the left indicating a decrease in supply. The law of supply
The second factor that causes shifts in supply is the price of inputs. When the price of inputs decrease, suppliers/firms increase the production of commodities. This increases the supply of commodities in the market. Thus there is a rightward shift of the supply curve. But when the price of inputs increase, firms will not produce optimally. As a result the supply of goods will decrease in the economy. This will cause a leftward shift of the supply curve.
Technology and Law of Supply
Another important factor that causes a shift in the supply curve is technological development in the economy. Due to technological advancement the cost of production decreases. As a result, the firms increase their production. This ensures the supply increases in the economy. There is a rightward shift of the supply curve.
The last factor that affects the shift in supply under law of supply is government taxes. When the tax rate is low, firms increase their production. This enables the supply of goods and services to increase in the economy. As a result the supply curve shifts towards the right. But when the tax rate is high, production drops in the economy. As a result, the supply curve shifts towards the left indicating a fall in supply.
Exceptions to Law of Supply
There are certain exceptions to the law of supply. That is, the law of supply does not function in its usual way. The law of supply states when the price of a commodity is high the quantity supplied is high. The firms unusually increase the price to increase their profits. Let us check some of the exceptions to the law of supply.
In case of closure of business, the supply of commodities is high but the price of the commodities are low. Distress selling is the sell of goods at a low price due closure of business. The sale of these commodities ensure clearance of stock. Therefore, for this case the law of supply does not apply. Sometimes in case of market competition, firms sell more commodities at a low price. In such situations too, the law of supply does not apply. The third exception is in case of perishable commodities. In certain situations perishable commodities are sold at a low price. Because these products come with an expiry date. The law of supply is not followed in the above cases.
In this blog, we have seen the whereabouts of the law of supply. Law of supply is the relationship between price and quantity supplied. We can see that there is a positive relation between price and quantity supplied in the economy. Thus, when price increases the quantity supplied also increases. At the same time we have also seen the exceptions to the law of supply.
The factors determining the law of supply is also an important section. We get a better understanding about supply and the law of supply. The factors how they affect supply in the economy gives an idea about the law of supply. We have seen the price of the commodity, tax rate, technology etc, affect supply in various ways.