9 Main Assumption of the Law of Supply

In this case, wages are regarded as the price of labor. It can be interpreted from the graph that as the wages of a worker increases, its quantity supplied that is working hours decreases, which is an exception to the law of supply. According to the law of supply, if the price of a product rises, then the supply of the product also rises and vice versa. However, there are certain conditions where the law of supply is not applicable. These conditions are known as exceptions to law of supply.

For example, a business will make more of a good if the price of that product increases. So, if the price of TVs increases, TV producers are incentivized to produce more of them. Likewise, other companies may be induced to start producing TVs.

8.Price of the Commodity There is a direct relationship between price of a commodity and its quantity supplied. When price increases, supply also increases because it motivate the firm to supply more in order to get more profit. When price decreases, smaller quantity will be supplied as profit decreases. The law of supply states that price and quantity supplied are inversely related. It states that “other things remaining the same the quantity supplied of a commodity extends with a rise in its price and contracts with a fall in its price”. In other words the quantity supplied changes directly with price.

To be more specific, this means that the equilibrium price for the goods at the market is $4.00. If the producer lowers the price below $4.00, an excess in demand would cause the buyers to want more pineapples than the fruit stand can sell. If the supplier raises the price above $4.00, an excess in supply would cause buyers to want fewer pineapples than the fruit stand can sell. If the fruit stand keeps the price of their pineapples at $4.00, then there is a balance between supply and demand which is good for both the buyers and the fruit stand. Rare articles – Rare, artistic and precious articles are also outside the scope of the law of supply.

This phrase is used to cover the following assumptions on which the law is based. Various economists have extensively studied the behavior of sellers and producers and firms. As a result they arrived at a generalization of their behavior called the Law of Supply. Production activities and supply of different goods very much depends upon the system of taxation. If heavy taxes are imposed on production of different goods then their supply my decrease.

If the cost of production increases along with the rise in the price of product, the sellers will not find it worthwhile to produce more and supply more. Therefore, the law of supply will be valid only if the cost of production remains constant. It implies that the factor prices such as wages, interest, rent etc., are also unchanged. The law of supply and demand outlines the interaction between a buyer and a seller of a resource.

Affecting factors

The law explains a definite relationship between the prices of a commodity and its quantity supplied. The capital goods are raw material, machinery, tools etc. The cost of production increases due to increase in prices of capital goods. The supply curve is upward sloping because, over time, suppliers can choose how much of their goods to produce and later bring to market. In Figure-16, SMS1 is the exceptional supply curve for labor.

Individual sellers sell different amounts of a good at different price this is shown in the individual supply schedule. The individual supply schedule of a commodity means how price of a commodity which the sellers are willing and able to make available in the market. 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.

Assumptions

Market supply schedule can be drawn by aggregating the individual supply schedules of all individual suppliers in the market. Here, in this diagram the supply curve SS is sloping upward. It suggests with the supply schedule, that the market supply tends to expand with the rise in price and vice-versa. Similarly, the upward slopping curve also depicts a direct co-variation between price and supply. If sellers expect a fall in price in the future, then the law of supply may not hold true.

Increase in number of firms raises the market supply. However, as the price starts falling, some firms which do not expect to earn any profits at a low price either stop the production or reduce it. It reduces the supply of the given commodity as the number of firms in the market decreases. In the given figure, price and quantity supplied are measured along the Y-axis and the X-axis respectively.

In economics supply and demand are two basic concepts and backbone of market economy. In terms of economics supply means “an amount of a commodity or service which sellers are willing and able to sell at a given price during a given period of time”. » If the other factors remains constant then the supply of commodity increase with increase in its price and vice versa.»

• If the cost of production increases along with the rise in the price of product, the sellers will not find it worthwhile to produce more and supply more.
• It assumed that there is no change in cost of production because of the profit decreases with the increase in cost of production and it causes the decrease in supply.
• Supply of agricultural products usually changes with change in weather.
• In the short run the existing firms reap abnormal profit.
• The total number of firms or sellers remain the same.
• If the fruit stand keeps the price of their pineapples at $4.00, then there is a balance between supply and demand which is good for both the buyers and the fruit stand.

It is because, for the perishable goods, sellers cannot wait for a long time and if these types of goods remain unsold, then they will face only loss. It is also assumed that the taxation policy of government does not change. The increase in taxes effects the investment and production and supply of goods decreases. The supply of a commodity depends on the natural environment. The supply of agricultural product is affected adversely by weather, natural calamities like flood, cyclone etc. On the other hand adequate rainfall and good weather etc. increase supply.

Law of Supply : Assumptions, Exceptions and Limitations

“Other things being constant, higher the price of a commodity, more is the quantity supplied and lower the price of a commodity less is the quantity supplied”. Capacity – If the number of factories producing the goods increase, the quantity supplied will increase, vice versa. We can easily find adequate metaphor even in the university to understand the concept of Law of Supply.

There are five types of supply—market supply, short-term supply, long-term supply, joint supply, and composite supply. Meanwhile, there are two types of supply curves—individual supply curves and market supply curves. Individual supply curves graph the individual supply schedule, while market supply curves represent the market supply schedule. It is observed that the producer seller sells less at low price. With rising prices viz 13, 14, 15 the quantity of wheat rises from 30 to 40 kilograms.

We know that price is a dominant factor in determining the supply of a commodity. As price of the commodity increases, there is more supply of that commodity in the market and vice versa. 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.

Similarly, if the price of the product decreases, the supplier would decrease the supply of the product in market as he/she would wait for rise in the price of the product in future. During a given period of time, it is assumed that the scale of production is held constant. If there is a changing scale of production the level of supply will change, irrespective of changes in the price of the product. In the figure above OX axis shows quantity of demand and OY axis shows price. SS1 line is the line of supply when the price of the commodity is OP then quantity of supply is OQ. “Other things remaining unchanged, the supply of a commodity rises i.e., expands with a rise in its price and falls i.e., contracts with a fall in its price.

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The law of supply depicts this functional relationship between price of a Commodity and its supply. Unlike law of demand, the quantity supplied generally varies directly with price. The law of supply states that other things being equal; more of a commodity is supplied at a higher assumption of law of supply price, and less at a lower price. Thus the quantity supplied of a commodity falls with a fall in price and rises with a rise in price. The relation between price and quantity supplied is direct and positive. The supply schedule and supply curve reflect the law of supply.

But in some exceptional cases where supply may tend to fall with the rise in price or tend to rise with the fall in price. The law also assumes that the sellers do not speculate about the future changes in the price of the product. If, however, sellers expect prices to rise further in future, they may not expand supply with the present price rise. It is assumed that transport facilities and transport costs are unchanged. Otherwise, a reduction in transport cost implies lowering the cost of production, so that more would be supplied even at a lower price. It describes seller’s supply behaviour under given conditions.

ASSUMPTIONS TO THE LAW OF SUPPLY

The law of supply expresses the nature of relationship between quantity supplied and price of a product, while the supply function measures that relationship. The law of supply does not apply to agricultural goods as their production depends on climatic conditions. If, due to unforeseen changes in weather, the production of agricultural products is low, then their supply cannot be increased even at higher prices.

In such a case, sellers would not supply the whole quantity of the product and would wait for the increase in price in future to earn high profits. In the above figure, X-axis represents quantity supplied and Y-axis represents the price of the commodity. Supply https://1investing.in/ curve ‘SS’ slopes upwards from left to right which has a positive slope. It indicates a direct relationship between price and quantity supplied. Supply refers to the quantity of a commodity offered by a seller or a particular firm at a certain price.