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What Is Meant By The Law Of Supply? How Does It Work?

Referencing Styles : APA | Pages : 1

Law of supply

The law of supply imitates the sellers’ general tendency to offer their stock of a commodity for sale regarding the changing prices. Law of supply helps in describing the supply behaviour of the sellers under provided conditions. According to the observation, sellers have the tendency of supplying more when there is rise in prices. According to the condition of the law of supply, there is a rise in the supply of the commodities when other things remain unchanged; that is there is an expansion in the supply of the commodities in the presence of rise in the price. It can be said in the other words that higher price lead to the higher supply and lower price leads to lower supply. For this reason, the law of supply suggests that the supply differs directly with the change in price. For this particular reason, sellers supply a large amount in the market at higher price than a lower price in the market.

More specifically, the law of supply indicates towards the crucial fact that there is the presence of a positive relationship between the supply of a particular commodity and its price. It implies that there is an increase in the supply of a particular commodity in the presence of increase in its price; and the supply of that same commodity decreases when there is fall in its price when other things remain constant. In the concept of law of supply, ‘other things’ are crucial aspect that need to be taken into consideration since these are the factors that have influence on the supply of the commodity; like technology, prices of related products, input price, size as well as nature of the industry, government policies and others. The law of supply is based on a certain notion that due to the increase in the price of a particular commodity, there is also increase in the sales of the commodity by the suppliers having an objective of profit maximization.

There are certain underlying assumptions in the law of supply that are needed to take into consideration. These crucial assumptions of law of supply are as follows:

  1. There must not be any change in the income of the seller or the purchaser.
  2. There must not be any change in the production technique and this is considered as crucial so that the cost can be unchanged. In case there is any reduction in the cost of production due to improved technique, there would be more supply from the seller’s end even in the falling of price,
  3. There should not be any change in the transportation cost. This is a crucial assumption where it is assumed that the transportation costs and transportation facilities do not change. Otherwise, a decrease in the cost of transportation means dropping the cost of production so that more communities would be supplied even in the inferior price.
  4. The cost of production should not be changed. It is assumed that there is change in the price of the product, but cost of production remains unchanged. In case there is an increase in cost of production along with product price, it will not be worthwhile for the seller to produce more as well as supply more.
  5. Scale of production should be fixed during a given period of time; because level of supply will change due to change in production scale.
  6. There must not be any speculation about the future price changes of the products.
  7. The price of other goods should remain unchanged. In case there is rise in the price of some other products quicker than that of the production, the producers may transfer their resources to certain other products.
  8. The policies of the government should not change; such as the policies like trade policy, taxation policy and others.

Its work

The working of the law of supply can be explained with the assistance of supply schedule along with a supply curve on the basis of the following made-up data and figure. The market supply schedule is as below:

 

Price of a Pen ($)

Quantity Supplied (in ’000 per week)

10

20

30

40

10

13

20

25

 

This can be shows in the form of the below diagram:

 

In the above diagram, SS is the supply curve. It can be seen from the above figure that the supply curve SS is slopping upward. It indicates in the presence of the supply schedule that there is a tendency of the expansion of the market supply in the presence of the rise in price and vice-versa. Likewise, the upward slopping curve also indicates that there is a direct co-variation between the price and supply. It implies that there will be increase in the price due to the increase in supply and vice versa.

 

The law of supply can also be shown in the above manner. In the above diagram, the quantity of demand is shown through OX axis and price is shown through OY axis. The line of supply is the SS1 line and the OP line is the price of commodity. OQ line is the quantity of supply. At the time of rise of price from OP to OP2, there is also rise in supply from OQ to OQ2. This indicates towards the crucial aspect that due to the rise in the price, there is also increase in the profitability of the suppliers; and thus, the seller is willing to supply more. Likewise, in case there is reduction in price from OP to OP1, then there will be reduction in supply from OQ to OQ1. It implies that due to the decrease in price, there is decrease in profitability of the supplier and thus the suppler is not willing to supply more. On the basis of the above diagram, it can be concluded that in case there is an increase in price, supply also increases; and in case there is reduction in price, supply also decreases.

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