Law of Supply:
Definition of
Law of Supply:
There is direct relationship between the price of a
commodity and its quantity offered fore sale over a specified period of time.
When the price of a goods rises, other things remaining the same, its quantity
which is offered for sale increases as and price falls, the amount available for
sale decreases. This relationship between price and the quantities which
suppliers are prepared to offer for sale is called the law of supply.
Explanation of Law of Supply:
The law of supply, in short, states that ceteris paribus sellers supply more goods at a
higher price than they are willing at a lower price.
Supply Function:
The supply function is now
explained with the help of a schedule and a curve.
Market Supply Schedule:
Market Supply Schedule of a Commodity:
(In Dollars)
|
Px |
4 |
3 |
2 |
1 |
| QxS |
100 |
80 |
60 |
40 |
In the table above, the produce are able and willing
to offer for sale 100 units of a commodity at price of $4. As the price falls,
the quantity offered for sale decreases. At price of $1, the quantity offered
for sale is only 40 units.
Law of Supply Curve/Diagram:
The market supply data of the commodity x as shown
in the supply schedule is now presented graphically.
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. The supply curve SS/
slopes upward from left to right indicating that less quantity is offered
for sale at lower price and more at higher prices by the sellers not supply
curve is usually positively sloped.
Formula for Law of Supply/Supply Function:
The supply function can also be expressed in
symbols.
QxS = Φ (Px
Tech, Si,
Fn, X,........)
Here:
Qxs = Quantity supplied of
commodity x by the producers.
Φ = Function of.
Px = Price of commodity x.
Tech = Technology.
S = Supplies of inputs.
F = Features of nature.
X = Taxes/Subsidies.
= Bar on the top of last four non-price factors
indicates that these variables also affect the supply but they are held constant.
Example of Law of Supply:
The law of supply is based on a moving quantity of
materials available to meet a particular need. Supply is the source of economic
activity. Supply, or the lack of it, also dictates prices. Cost of scarce supply
goods increase in relation to the shortages. Supply can be used to measure
demand. Over supply results in lack of customers. An over supply is often a
loss, for that reason. Under supply generates a demand in the form of orders, or
secondary sales at higher prices.
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 supply
function requires more pens, which generates more production to meet demand.
Assumptions of Law of Supply:
(i) Nature of Goods. If the goods are
perishable in nature and the seller cannot wait for the rise in price. Seller
may have to offer all of his goods at current market price because he may not
take risk of getting his commodity perished.
(ii) Government Policies. Government may
enforce the firms and producers to offer production at prevailing market price.
In such a situation producer may not be able to wait for the rise in price.
(iii) Alternative Products. If a number of
alternative products are available in the market and customers tend to buy those
products to fulfill their needs, the producer will have to shift to transform
his resources to the production of those products.
(iv) Squeeze in Profit. Production costs like
raw materials, labor costs, overhead costs and selling and administration may
increase along with the increase in price. Such situations may not allow
producer to offer his products at a particular increased price.
Limitations/Exceptions of Law of Supply:
Exceptions that affect law of supply may include:
(i) Ability to move stock.
(ii) Legislation restricting quantity.
(iii) External factors that influence your industry.
Importance of Law of Supply:
(i) Supply responds to changes in
prices differently for different goods, depending on their
elasticity or inelasticity. Goods are elastic when a modest
change in price leads to a large change in the quantity
supplied. In contrast, goods are inelastic when a change in
price leads to relatively no response to the quantity supplied.
An example of an elastic good would be soft drinks, whereas an
example of an inelastic service would be physicians' services.
Producers will be more likely to want to supply more inelastic
goods such as gas because they will most likely profit more off
of them.
(ii) Law of supply is an economic
principle that states that there is a direct relationship
between the price of a good and how much producers are willing
to supply.
(iii) As the price of a good
increases, suppliers will want to supply more of it. However, as
the price of a good decreases, suppliers will not want to supply
as much of it. For producers to want to produce a good, the
incentive of profit must be greater than the opportunity cost of
production, the total cost of producing the good, which includes
the resources and value of the other goods that could have been
produced instead.
(iv) Entrepreneurs enter business ventures with the intention of
making a profit. A profit occurs when the revenues from the
goods a producer supplies exceeds the opportunity cost of their
production. However, consumers must value the goods at the price
offered in order for them to buy them. Therefore, in order for a
consumer to be willing to pay a price for a good higher than its
cost of production, he or she must value that good more than the
other goods that could have been produced instead. So supplier's
profits are dependent on consumer demands and values. However,
when suppliers do not earn enough revenue to cover the cost of
production of the good, they incur a loss. Losses occur whenever
consumers value a good less than the other goods that could have
been produced with the same resources.
Determinants of Supply:
There are four important
Determinants of Supply
as under:
(i) Technology changes.
Technology helps a producer to minimize his cost of
production.
(ii) Resource supplies. The producer also has to pay
for other resources such as raw materials and labor. if his
money is short on supplying a certain number of products
because of an increase in resource supplies, then he has to
reduce his supply.
(iii) Tax/ Subsidy. A
producer aims to maximize his profit, but an increase in tax
will only increase his expenses, decreasing his capacity to
buy resource supplies and forcing him to reduce his supply.
(iv) Price of other goods
produced. A producer may not only produce on product but
other products as well. A producer's money is limited and if
he increases his supply in one product, he would have to
decrease his supply in the other product, no unless his sales
increase.
Thus:
Qxs = Φ (Px)
Ceteris Paribus
Ceteris Paribus. In economics, the term is
used as a shorthand for indicating the effect of one economic variable on
another, holding constant all other variables that may affect the second
variable.
Relevant Articles:
|
