Let’s start this article on the Law of Supply…
Meaning of Supply-
Supply refers to the schedule of the quantities of a good that the firms are able and willing to offer for sale at various prices. The capability of a firm for producing a commodity depends on the resources available and the technology they employ in production.
Supply and Quantity Supplied-
Supply should be distinguished from the quantity supplied. Supply is a flow concept, that is, it refers to the amount of a commodity that the firms are able to produce and offer for sale in the market per period of time, say a week, a month, or a year.
The quantity supplied refers to the quantity of a commodity which the firms are able and willing to sell at a particular price of the commodity.
Supply Function-
Supply function of a commodity is written as
Qs= S ( Px, F1, F2,F3…,Fm)
where Qs= the quantity supplied of the commodity X
Px= the commodity X
F1,F2,F3…Fm= prices of inputs and the state of technology used to produce commodity X
Law of Supply-
According to the law of supply, when the price of a commodity rises, the quantity supplied of it in the market increases, and vice versa, other factors determining supply remaining the same.
Thus, according to the law of supply, the quantity supplied of a commodity is directly or positively related to price. It is due to this positive relationship between price of a commodity and its quantity supplied that the supply curve of a commodity slopes upward to right.
Assumptions of Law of Supply-
In case of other laws of Economics, the law of supply is also based on some assumptions:
- The law of supply assumes that firms operate in a competitive market structure and no individual firm has a monopoly over the production of the commodity,
- The firms should aim at maximizing profits or sales revenue,
- No change in the state of technology,
- No change in the sellers’ expectations regarding future prices, etc.
Factors Determining Supply-
The quantity of a commodity that firms will be able and willing to offer for sale in the market depends on several factors. The important factors determining supply of a commodity are:
- The State of Technology-
The change in technology significantly affects the supply function by altering the cost of production. If there occurs an improvement in production technology used by the firm, its production efficiency increases which reduces the unit cost of production.
- Price of Inputs-
Changes in prices of inputs used in production also cause a change in cost of production and bring a change in supply. For example, if either wage of labour increases or prices of raw materials and fuel go up, the unit cost of production will rise which reduces the profit of firm owner.
- Prices of related Products-
Any change in the prices of related products would influence the supply of a product by causing substitution of one product for another.
- Number of Firms-
If the number of firms producing a product increases the market supply of the product will increase causing a rightward shift in the supply curve. When, in the short run, firms in an industry are making large profits, the new from enter the industry in the long run and consequently the total production and supply of the product of the industry increases. On the other hand, due to losses in the short run, if some firms leave the industry in the long run, the supply of its product will decline.
- Future Price Expectations-
The supply of a commodity in the market also determined by sellers’ expectations of future prices. During inflation, sellers’ expect the prices to rise in future they would reduce the current supply of a product in the market. This will create a shortage of the commodity.
- Taxes and Subsidies-
Taxes and subsidies also influence the supply of a product. If an excise duty or sales tax is levied on a product, the firm will charge higher profit for the same amount of the commodity. On the other hand, when government provides subsidy on a commodity, it will reduce the supply price of the commodity.
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