The law of supply is a very important concept of supply and economics because it helps in understanding the relationship between price and a commodity. According to the law of supply, whenever the price of a commodity increases, the supplier supplies more of that commodity, similarly, whenever the price of a commodity decreases, the supplier supplies less of that commodity. This happens because when the price increases the supplier can make more money by selling more goods.
The law of supply is exactly the opposite of the law of demand because according to the law of demand when the price decreases the consumers increase the demand and according to the law of supply when the price increases the supplier increases the supply. Sometimes sellers create shortage in the market to create demand at higher prices and this is possible only when the seller community is involved in creating shortage. Creating a shortage in the market is an illegal activity which the governing authorities keep trying to stop.
What is the law of supply?
The law of supply means the relationship between price and supply and there is a direct relationship between the two. According to this, when the price of a commodity increases, the supply of that commodity increases, similarly when the price of a commodity decreases, the supply of that commodity decreases.
The law of demand applies only when all other things remain equal. If the supply increases and decreases due to any reason other than the price of the commodity then it will not come under the law of supply because the law of supply applies only when the assumptions of the law of supply are fulfilled.
Explanation of the law of supply
Let us understand the law of supply with the help of tables and charts.
Explanation of table: The table shows that when the price is Rs 10, the supply of commodity is 100 units, and when the price rises to Rs 50, the supply of commodity becomes 500 units. This tells us that when the price increases, the supply of commodity also increases. Similarly, when the price decreases the supply also decreases.
Explanation of graph: The Y-axis shows the price of the commodity and X-axis shows the quantity of the commodity. The above graph shows that when the price of the commodity is Rs 10 the quantity supplied is 100 units, similarly when the price of the commodity increases to Rs 50 the quantity supplied is 500 units.
Assumptions of the law of supply
Following are the assumptions of the law of supply:
- No change in production technology.
- No change in the number of firms in the market.
- No change in the objectives of the firm.
- No change in the prices of other resources.
- There is no change in the prices of means of production.
- There is no expectation of change in price in future.
- There is no change in the prices of the concerned items.
Why does the supply curve slope upward?
There are many reasons for the upward slope of the supply curve, some of them are as follows:
1. Price of commodity:
There is a direct relationship between the price of a commodity and the supply of the commodity. If the price of a commodity is high, then the supply of the commodity is also high. Similarly, when a commodity’s price decreases, the commodity’s supply also decreases.
2. Price of related commodity:
If the price of the concerned commodity increases, then the supply of that commodity increases.
3. Change in Technology:
Technological changes also affect supply. As technology keeps changing, the cost of production also reduces, and production increases as compared to before. Due to this the supply also increases.
4. Number of Firms:
If the number of firms is increasing, the supply of commodity will also be increasing. Similarly, if the number of firms decreases, the supply of commodity will also decrease.
5. Goals/Objectives of the Firm:
The objective of the firm also affects supply. If the firm aims to earn more profit, then the firm creates a shortage to sell at a higher price. Similarly, if the objective of the firm is to increase sales, then the firm provides a huge supply in the market and also sells the commodity at low prices in the market.
6. Government Policy:
Government policy also greatly influences supply. Like increase in taxes leads to decrease in supply and decrease in taxes leads to increase in supply.
Reas Also:
QNA/FAQ
Q1. What is the law of supply?
Ans: Many elements affect supply, but among them, price affects supply the most. There is a direct relationship between supply and price. The law of supply states that when the price of a commodity increases, the supply of that commodity increases and when the price decreases, the supply of that commodity decreases.
Q2. Write the assumptions of law of supply.
Ans: The following are the assumptions of the law of supply.
1. No change in production technology.
2. No change in the number of firms in the market.
3. No change in the objectives of the firm.
4. No change in the prices of other resources.
5. There is no change in the prices of means of production.
6. There is no expectation of change in price in future.
7. There is no change in the prices of the concerned items.
Q3. Why does the supply curve slope upward?
Ans: There are many reasons for the upward slope of the supply curve, some of them are as follows:
1. Price of commodity
2. Price of related commodity
3. Change in Technology
4. Number of Firms
5. Goals/Objectives of the Firm
6. Government Policy
