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Theory Of Supply

Law of Supply

We as individuals are always looking to increase our profit margins. Evidently, when we get more value for something we pounce on that opportunity in the same way a tiger does on a deer! When suppliers get more value for their produce, they behave in the same manner. This is the law of supply.

Supply

To recollect, supply is the number of goods and services that the suppliers are both willing and able to supply at a particular price during a given period of time. To point out, the willingness to supply should be backed by the ability to supply.

Now, supply depends on a large number of factors. A change in any of these factors induces a change in the supply. Of all these determinants of supplythe price is the most important one.

Law of Supply

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The Law of Supply

As mentioned in the introduction, a man of normal intellect always prefers to increase his profit. Talking about the suppliers, when a supplier gets more price for his supply, the normal behavior would be to increase the supply, in order to extract greater profits. This is the law of supply.

Technically, the law of supply states that other factors remaining constant, the quantity of a good produced and offered for sale would increase with an increase in its price and decrease as the price falls.

Thus the law of supply acts as a bridge between the supply of a commodity and its price. Further, we can say that there is a direct relationship between the supply of a commodity and its price.

Again, this law is a result of common sense, as at higher prices a supplier would be looking at greater profit margins and hence it acts as an incentive for increasing the supply.

This law is true for a majority of day-to-day occurrences of supply. However, there are some exceptions to the law of supply. The supply of labor at high wages, for example, decreases instead of increasing.

This is because an employer pays more only when you possess a skill which is not so common. Thus, the supply depends upon the phenomenon under consideration and the extent to which supply can be altered.

Further, the behavior of supply is also the slave of time, for obvious reasons. When talking about short-run, we can play with supply only up to a certain extent, permissible under the short time frame.

On the contrary, in the long run, changes on a large scale become a part of the equation allowing us to alter the supply to a greater extent. Below, is the graphical representation of the law of supply, the supply curve.

Law of Supply

Solved Example on Law of Supply

Q: Which of the following is/are not characteristic(s) of the law of supply

  1. All factors other than price are constant
  2. Establishes that there is a direct relationship between the price and the supply of a commodity
  3. There are no exceptions to the law of supply
  4. Establishes that there is an inverse relationship between price and supply of a commodity

AnsOptions ‘c’ and ‘d’ are not affirmations of the law of supply.

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