What is Law of Supply?
The law of supply states that other factors being equal, the quantity of a good supplied increases with an increase in the price level and decreases with a decrease in the price level of a good.
The supply schedule below shows the positive relationship between price and quantity supplied
|Price (in Rs)||Quantity Supplied|
A supply curve is a graphical representation of the supply schedule which indicates various quantities of a commodity available for sale at different possible prices of that commodity. It indicates a positive relationship between the price of a commodity and its quantity supplied. There are two aspects— individual supply curve and market supply curve.
- Individual supply refers to the supply of a particular commodity by an individual firm at a given price in the market.
- Market supply curve is derived by the horizontal summation of the supply curves of all the firms in the industry.
SS is the supply curve sloping upwards. When the price increases from Rs 5 to Rs 15, the quantity supplied also increases from 100 to 300 units. While deriving the supply curve, it is assumed that all the other factors, such as input prices or technology influencing the quantity of commodity supply except its price, remain constant. This is called the ceteris paribus assumption. Hence, the supply curve is also called the ceteris paribus supply curve
Why does the supply curve slope upwards?
- Law of diminishing marginal productivity: As more units of the variable factor are used, the addition made to the total production reduces and the cost of production rises. Hence, more quantity is supplied only at higher prices to cover the rise in the cost of production.
- Change in stock: Because of an increase in prices of the commodity, sellers sell more commodities from their old stock. While the price of the commodity decreases, sellers would increase their stock to avoid losses.
- Profit and loss: With an increase in prices of commodity, producers would increase the production and supply to gain more profit.
Exceptions of the Law
- Sellers may be willing to sell more units at declining prices for perishable goods.
- The supply will remain limited even if their prices are high for goods having social distinction.
Change in Quantity Supplied and Change in Supply
A change in quantity supplied refers to a movement along a given supply curve because of a price change, whereas a change in supply means a shift of the supply curve because of a change in other factors.
Movement along the supply curve and shift of the supply curve
|Movement along the Supply Curve||The shift of the Supply Curve|
|It refers to a change in the quantity of a commodity supplied because of a change in the price of the commodity.||It refers to either an increase or decrease in the supply of a commodity at a given price.|
|Because of an increase in the price level, there|
is a movement from the left to the right along any supply curve. It indicates an increase, i.e. extension in the quantity supplied.
|Because of a decrease in the supply of a|
commodity at a given price, there is a leftward shift in the supply curve.
|Because of a decrease in the price level, there|
is a movement from the right to the left along any supply curve. It indicates a decrease, i.e. contraction in the quantity supplied.
|Because of an increase in the supply of a|
commodity at a given price, there is a rightward shift in the supply curve.
|Assume that all the other factors, except the price of the commodity, remain constant.||Assume that all the other factors, such as input prices and technologies, are flexible.|
Increase in supply and extension in supply
- Increase in supply: It is due to technological advancement, decrease in input prices, decrease in unit tax, decrease in prices of other related goods and the prices of the good remaining constant.
- Extension in supply: With an increase in the prices of the good, the other determinants of supply will remain constant.
Decrease in supply and contraction in supply
- Decrease in supply: It is due to an increase in input prices, increase in unit tax, increase in prices of related goods and the prices of the good to remain constant.
- Contraction in supply: With a decrease in the price of a good, the other determinants of supply will remain constant
Meaning and Functions of Money
Law of Supply