Law of Supply: Schedule, Curve, Function, Assumptions and Exception

Law of supply is not applicable under the circumstances when there is an expectation of change in the prices of a product in the near future. Auction can take place due to various reasons, for instance, a bank may auction the assets of a customer in case of his failure in paying off the debts over a period of time. As mentioned earlier, the supply of a commodity is dependent on many factors other than price, such as consumers’ income and tastes, price of substitutes, natural factors, etc. When a seller wants to clear its old stock in order to store new goods, he may sell large quantity of goods at heavily discounted price. Supply of labour after a certain point, when the wage rate rises, its supply will tend to diminish.

Here the wage rate has been regarded as the price of labour and the labour supply is determined in terms of Labour-Hours the worker is willing to work at a given wage rate. It has been observed that as wages increase, a worker might work for a lesser number of hours than before. In this connection if the seller expects a rise in the price in future, he may withhold his stock of the commodity. He will therefore reduce his supply in the market at the present price. Similarly, if he expects a further fall in price in future, he will try to dispose of the commodity and will supply more even at a lower price.

They’re those who see a drop in demand when incomes rise because consumers trade up for higher-quality products. Supply and demand don’t necessarily respond to price movements proportionally. The degree to which price changes affect the product’s demand or supply is known as its price elasticity. Therefore, if there is a rise in the price, the supply also increases, giving sellers a chance to make more money. This example assumes that product differentiation does not exist.

No change in the price of capital goods

If the price is $50,000, this good would likely be considered a luxury good, and demand would be low. Supply refers to the quantity of goods and services that firms are willing and able to provide/sell in a time period. It would then be possible to increase the supply of agricultural products. If the means of transport are cheap and fast, then the supply of the commodity can be increased at short notice at a lower price.

Limitations and Factors Affecting the Law of Supply

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. The law of demand is a fundamental principle of economics that states that at a higher price, consumers will demand a lower quantity of a good, and vice versa. Thus, the production of agricultural products cannot be increased beyond a limit.

The law of supply reflects the general tendency of the sellers in offering their stock of a commodity for sale in relation to the varying prices. If assumptions of law of supply the price of raw materials used in the production of a product goes down, then S will increase—this means that it will shift to the right. And in the reverse, if the price of inputs increases, then S will decrease, meaning that it will shift to the left.

How the law of supply relates to the law of demand

1. Real-world supply decisions are influenced by a multitude of factors, and economic models, including the law, serve as simplified representations of supply behavior.
2. Under this situation and circumstances, more of the product in consideration may not be supplied, despite the rising prices.
3. If there is an increase in tax rates, then the supply of product would decrease even at the higher price.
4. An auction sale takes place at that time when the seller is in financial crisis and needs money at any cost.
5. Consumers typically look for the lowest cost, and producers test their products at the highest price.

A lot of people might think that more sellers being in the market will prompt each of the sellers to produce less—and that makes sense, at first thought. However, in reality, this doesn’t tend to occur in a market that contains a healthy and normal level of competition. Gasoline consumption plunged with the onset of the COVID-19 pandemic in 2020 and prices quickly followed because the industry ran out of storage space.

The law of supply is one part of the law of supply and demand. Like the law of demand, the law of supply also follows the assumption of ceteris paribus, which means that ‘other things remain unchanged or constant’. Law of Supply provides a useful framework for understanding the basic relationship between price and quantity supplied, it is essential to recognize its limitations.

However, if they expect the price to rise in the future, they would reduce the supply of the commodity, in order to supply the commodity later at a high price. Supply function is the mathematical expression of law of supply. In other words, supply function quantifies the relationship between quantity supplied and price of a product, while keeping the other factors at constant. The law of supply expresses the nature of relationship between quantity supplied and price of a product, while the supply function measures that relationship. On the other hand, if prices fall, suppliers won’t produce as much.

However, once the price begins to decline, some businesses that do not anticipate making any money at a low price may stop production or cut it back. As the number of businesses in the market declines, it decreases the supply of the given commodity. However, the commodities affected by these external factors remain subject to the fundamental forces of supply and demand as long as buyers and sellers retain agency. The supply curve slopes upward because, over time, suppliers can choose how much of their goods to produce and later bring to market. In the given figure, price and quantity supplied are measured along the Y-axis and the X-axis respectively. By plotting various combinations of price and quantity supplied we derived points A, B, C, D, E curve and joining these points we find an upward sloping i.e.

The elasticity of supply measures the responsiveness of quantity supplied to changes in price. If supply is elastic, producers can quickly adjust production levels in response to price changes. According to the Law of Supply, as the price of a good increases, producers are incentivized to supply more of that good to the market, aiming to maximize profits. Similarly as the price decreases, the incentive to supply diminishes. Price is a dominant factor in the determination of the supply of a commodity. As the price of a commodity increases, the supply of that commodity in the market also increases and vice-versa.