We know, price is the dominant factor in determining supply of a commodity. As price of the commodity increases, there is more supply of that commodity in the market and vice-versa. This behaviour of producers is studied under the law of supply. 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. This behaviour of the producers is studied through the law of supply.
Understanding the Cobb-Douglas Production Function: A Key Concept in Economics
An exception to the law of supply arises when there is a reduction in the quantity supplied with increasing prices. Several commodities fall under exceptions like farm produce, economic, perishable commodities, business change, and more. Farm products do not follow the law of supply due to their high dependency on weather conditions. Perishable products cannot be stored for a long period and thus have a short shelf life. Some of the examples include flowers, fruits, vegetables, and more, which the seller sells even if the prices are not rising.
Scarcity of the factor of production
Thus, supply of these goods cannot increase or decrease beyond a limit. In case of these goods, a rise or fall in price does not impact the supply. 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. According to the law of supply, if the price of a product rises, the supply of the product also rises and vice versa.
GGSIPU (MS Legal Aspects of Business
The supply of labour is one of the major examples of an exception to the law supply. The workers are generally concerned with high wages until a point. Once they are able to achieve a certain point they might like to dedicate their time to other activities. It means that after a particular period workers may not have a keen interest in high wages. Hence, initially, the labour supply is directly linked to the wages but after a particular point, the relation between the supply of labour and wages terms is inverse.
- In economically backward countries, production and supply cannot be increased with rise in price due to shortage of resources.
- Therefore, if there is a rise in the price, the supply also increases, giving sellers a chance to make more money.
- It is, therefore, important here to mention that the relationship between price and the quantities that suppliers are prepared to offer for sale is positive.
- Farm products do not follow the law of supply due to their high dependency on weather conditions.
- Conversely, lower prices reduce profitability, leading producers to supply less.
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The amount of investment is affected by the change in the political situation of a country. The production of goods decreases due to a decrease in investment. Law is one sided as it explains only the effect of change in price on the supply, and not the effect of change in supply on the price. For example, there would be a decrease in the supply of labour in an organisation when the rate of wages is high.
When your employer pays time and a half for overtime, the number of hours you are willing to supply for work might increase. Conversely, if the taxes on output in the country are low and the government encourages the import of foreign commodities, then the supply can be increased easily. In the case of seasonal products, supply doesn’t decrease despite a price decrease. Sometimes, an increase in the wage rate may cause a decrease in the supply of labor because of surplus income of labor.
The law states that when the price of commodity increases, its supply also goes up. Thus, the motive is to achieve more profit, sales, and demand for the product. When there is a change in the quantity supplied, it causes movements along the supply curve.
The law of supply can be explained with the help of supply schedule and supply curve as explained below. The market supply refers to the combined supply by every individual firm in a market at a price level. Supply refers to the quantity of goods and services that firms are willing and able to provide/sell in a time period. But Tom did it anyway, to earn more profit and maximize his gains. Therefore, this law throws light on a seller’s desire to maximize profit and sales in the market.
If any factor of production is not available or if there is any problem of transportation or communication, then the law may not operate. If ten people want to buy a pen, and there’s only one pen, the sale will be based on the level of demand for the pen.
The law assumes that all other factors influencing supply, such as technology, input prices, and government regulations, remain unchanged. This assumption isolates the effect of price on supply, making it easier to observe the direct relationship between price and quantity supplied. The law of supply and demand outlines the interaction between a buyer and a seller of a resource. It incorporates both the law of supply and the law of demand. The supply curve slopes upward because, over time, suppliers can choose how much of their goods to produce and later bring to market.
- The supply curve is vertical, meaning the quantity supplied does not change at all, no matter how high or low the price goes.
- Conversely, if the taxes on output in the country are low and the government encourages the import of foreign commodities, then the supply can be increased easily.
- We can show the supply schedule through the following imaginary table.
- A small increase in price leads to a proportionally larger increase in the quantity supplied.
Steps in Demand Forecasting Process
On the other hand, with fall in prices, supply also decreases as profit margin decreases at low prices. The assumption also holds that producers are motivated by profit maximization. When prices rise, firms are incentivized to produce and sell more goods because the potential for higher profits increases. If prices fall, profitability decreases, and firms may reduce production or supply less. The law of supply states that, other things remaining the same, the quantity supplied of a commodity is assumptions of law of supply directly or positively related to its price. Thus, the supply curve of a commodity slopes upward from left to right.
The supply of goods decreases at that place at the previously prevailing price. In figure (4.1) the price is plotted on the vertical axis and the quantity supplied on the horizontal axis. Let us discuss important exceptions to the law of supply in detail.
In the figure (5.1) price is plotted on the vertical axis OY and the quantity supplied on the horizontal axis OX. The four points d, c, b, and a show each price quantity combination. If the price of a commodity decreases and the cost of production also decreases at the same time, the quantity supplied does not decrease, and profit remains constant. In the table above, the producers are able and willing to offer for sale 100 units of a commodity for 5$. As the price falls, the quantity offered for sale decreases.
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. 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. As we know that quantity supplied of a commodity is affected by fashion, taste and preferences of the consumer, technology and time. If the seller thinks that the goods are going to be outdated in the near future, he sells more at a lower price which is also against the law of supply.