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Define Law Of Supply. Explain In Detail How It Is Illustrated

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The law of supply is one of the fundamental principle of economic theory. The law of supply states that, keeping other factors constant, an increase in price results in an increase in quantity supplied and vice - versa. There is a direct relationship between price and quantity. The manufactures are willing to produce more and offer the products for sale in the market at higher prices. This way they can increase their profit. The law of supply has a positive relationship between quantity supplied and the price. This is the reason the supply curve is upward sloping. Supply in the market can be shown as an upward sloping supply curve. A supply curve shows how the quantity supplied will respond to various prices over a period of time.

The Chart shows the law of supply, using a supply curve. The slope is upward sloping, with points A, B and C on the supply curve. Each point on the curve shows a direct relationship between quantity supplied (Q) and price (P).The supply curve is upward sloping. The producers can choose how much of their goods to produce and later brings that to the market.

Supply of a commodity refers to the quantity of a commodity which producers or sellers are willing to produce and offer for sale at a particular price during a particular period of time. The three important things that needs to be noted in the definition of supply are :

  • Supply is a desired quantity, how much producers are willing to sell and not how much they actually sell.
  • Supply is always explained with reference to price. Just as demand for a commodity is always at a price, similarly supply of a commodity is always at a price. With a change in price of a commodity, its supply will change.
  • Supply is flow variable. Therefore, supply refers to the amount which producers or sellers are willing to sell during a specific period of time, like per day, per week, per month, per year.

Distinguish can be made between individual supply and market supply. Quantity of a commodity which one producer is willing to produce and offer for sale is known as individual supply. A single producing unit or a producer is called a firm in economics. Therefore, individual supply refers to the quantity of a commodity, which a firm is willing to produce and offer for sale at a particular price during a specified period. All the firms producing a commodity constitute an industry. The quantity that all the producers are willing to produce and offer for sale at a particular price during a specified period is known as market supply or the supply of the industry. Therefore, market supply or the supply of the industry is the sum total of supply of a commodity made by individual firm.

How much quantity of a commodity an individual or all the firms are willing to produce and offer for sale during a specified period of time is affected by various reasons :

  • Price of the commodity – the most important determinant of the supply of a commodity is its own price. Given other things, larger quantity of a commodity will be supplied at a higher price and smaller quantity will be supplied at a lower price. This will be so, as higher the price, given the per unit cost of production, higher is the per unit profit. The higher profit would motivate the firms to supply more, so that they can earn higher profit.
  • Goals of the firm – The goals or objectives of the firms also determine the supply of a commodity. The goals of the firms may be profit maximization, risk minimizer or sales maximization. Ordinarily, most of the firms try to earn maximum profits. This is the reason, it is assumed in economic theory that the objective of the firm is to maximize profit. Higher is the profit from the sale of a commodity, higher will be the amount supplied by the firms and vice – versa. At, times, the firms may aim to maximize the sales or revenue rather than the profits. They may like to maximize the sales in order to acquire status and prestige in the society or to dominate the market. If the firms aims to maximizing the sale, they may produce and sell more than the profit – maximizing output. Similarly, if the firms at minimizing the risk, they will play safe and produce and supply a smaller quantity of the commodity.
  • Input prices – Factors influencing the level of supply of a commodity is the prices of inputs, or factors used in production, like raw materials, machine, labor, etc. If the produces have to pay high price to secure the factors of production need for producing the commodity, its cost of production will be high. Given the price of the commodity, a higher cost of production reduces the profit margin. This will lead to a lower amount of output that the firms will produce and offer for sale at a given price level. A fall in the input prices and therefore, a fall in cost of production will have the opposite effect on supply.
  • Prices of related commodities – supply of a commodity depends upon the prices of related goods, mainly the substitute goods. Producers always have  the possibility of  shifting from the production of one commodity to the production of another commodity. If the prices of other commodities are rising, while the prices of the commodity under question remains constant, producers will find it more profitable to produce and sell other commodities. As a result, the supply of the commodity under question will fall. For example, a farmer can grow a variety of vegetables on a given  piece of land. If the market price of peas rises, farmers will produce and supply more peas at the cost of other vegetables by diverting resources from the production of other vegetables to production of peas.

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