Economic: Supply and Law of Supply

Supply

The quantities of goods and services that the suppliers are willing and able to sell in the market at fixed price in a unit of time is known as supply. One of the major objectives of the business people is to earn profit. So, they supply more goods and services at a higher price and vice versa. Various economists defined supply in their own way.

According to R.G. Lipsey, "The amount of a commodity that firms will be willing and able to offer for sale is called the quantity supplied of a commodity."

According to George Leyland, "Supply is a schedule of an amount that will be offered for sale at different prices during some time period other things remaining unchanged."

According to Getz and Watson, "In economic, the word supply means a schedule of possible prices and of amounts that would be sold at each price".

According to Prof. Meyers, "Supply as a schedule of the amount of a goods that would be offered for sale at all possibles prices at one instant of time, during any one period of time, for example, a day, a week and so on in which the conditions of supply remain the same".

In economic, supply means the quantity actually offered for sale at a fixed price with a limited time but the stock is potential supply, which can be offered for sale at a certain price if the condition is favorable.

LAW OF SUPPLY

"Law of Supply" shows the relation between quantity supplied of a commodity and its price. Law of Supply states that other things remaining same, quantity supply increases with a rise in price and decreases with fall in price. It means when a price of commodity increases, quantity supply also increases and when the price decreases, quantity supply also decreases. Hence, there is a direct relation between price and supply or supply is the function of price.

This law can be expressed symbolically, as S = f (P)

Where,

S = Quantity supply

P = Price of a commodity

f = function

Supply is influenced by the rate of return. Higher the expected rate of return, higher will be the production and quantity supplied.

ASSUMPTIONS OF THE LAW OF SUPPLY

This law is based on the following assumption

• No change in cost of production
• No change in season
• No change in technology
• No change in the number of firms
• No change in price expectation

Law of supply can be explained with the help of following schedule and diagram:

A tabular presentation of quantity supplied by a seller at a limited time with various price rate is called supply schedule.

Supply Schedule

Price (in Rs)	Quantity (in units)
50	100
60	200
70	300
80	400
90	500

 

From the above table, when the price is Rs 50 per unit, quantity supplied is 100 units. An increase in price to Rs 60, increases the quantity supplied to 200 units. The further increase in price to Rs 70, 80 and 90 leads to increase in quantity supplied to 300, 400 and 500 units respectively. Thus, the table shows the positive relation between price and supply. The increase in price increases the quantity supplied and decrease in price, decreases the quantity supplied.

 

The graphical presentation of the given table with various units of price and quantity supplied at a particular time is called supply curve.

In the above diagram, quantity supplied is measured along X-axis and price of a commodity is measured along the Y-axis. When the price of the commodity is Rs 50, the quantity supplied is 100 units. When the price increases to Rs 60, the quantity supplied also increases to 200 units. The supplied quantity increases simultaneously to 300, 400 and 500 units as the price increases from Rs 70, 80 and 90 respectively. Thus, SS₁ supply curve is constructed from the union of arrangement points of that price and supply. The supply curve slopes upward to the right. It indicates the positive relation between price and quantity supplied.

 

EXCEPTIONS OR LIMITATIONS OF LAW OF SUPPLY

There are some conditions under the Law of Supply does not hold true. Those conditions are called exceptions of Law of Supply. The exceptions or limitations are as follows:

1. Auction sale

Law of Supply does not hold true in a case of an auction sale. It happens when a seller is in the financial crisis. Seller becomes ready to sell his goods at any cost. So, it does not follow the law of supply.

2. Perishable goods

Those goods which have a very short life time and become useless after certain period of time are called perishable goods. Such goods are to be supplied within a limited time. So, the supply of perishable goods does not hold the law of supply.

3. Agriculture goods

The law of supply is not applicable to agriculture goods. The suppliers of such goods are governed by the seasonal factors than the price. So, the farmers may not wait for the application of a law of supply.

4. Stock Clearance

Due to advanced technology, new goods and services are produced which replaces the old one. The seller tries to sell more at a low price because of fear of being out of fashion and so to get rid of old stock. In this situation, this law may not exist.

5. Starting a new business

One who desires to start a new business sells the products at low cost to make money fast. In this condition, the law of supply does not exist.

6. Prediction of cost

If the cost of any goods and services are falling and are excepted to fall further, then the seller will be ready to sell more goods even the price falls. Thus, the law of supply does not exist in such condition.