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In this article in we will discuss about:- 1. Meaning of the Law of Supply 2. Assumptions of the Law of Supply 3. Schedule 4. Curve 5. Reasons for Operating 6. Exceptions.
Contents:
- Meaning of the Law of Supply
- Assumptions of the Law of Supply
- Supply Schedule
- Supply Curve
- Reasons for Operating the Law of Supply
- Exceptions to the Law of Supply
1. Meaning of the Law of Supply:
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Professor Alfred Marshall has given the statement of the law of supply as under:
“Ceteris paribus, the greater the quantity to be supplied, the greater must be the price at which it is offered in order that it may increase profit, or in other words, the quantity supplied increases with a rise in price and diminishes with a fall in price.”
The law of supply deals with the price of a commodity and its quantity supplied during a given period of time. There is a direct relation between the price of a commodity and its quantity supplied.
Other things being equal, higher the price higher will be the quantity supplied and lower the price lower will be the quantity supplied. It tells us the direction in the change of the supply of a commodity due to change in its price. Thus, there is direct and positive relationship between the price of a commodity and its quantity supplied.
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2. Assumptions of the Law of Supply:
The law of supply is applied when other things being equal. Other things being equal are the assumptions of the law.
The following are the assumptions of the law:
(1) Prices of factors of production (inputs) remain constant.
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(2) The income of buyers and sellers does not change.
(3) Preferences, tastes and habits of buyers and sellers remain constant.
(4) The technical know-how of producers and sellers remains constant.
(5) Prices of related goods do not change.
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(6) Expectations about change in future prices do not change.
(7) Smaller change in price of a commodity may also bring change in its supply.
3. Supply Schedule:
A schedule showing different quantity supplied of a commodity by a producer or a seller at different prices during a given period of time is called supply schedule. Professor Watson has defined, “A supply schedule is a relation between prices and quantities for a given commodity, in a given market, and in a given period of time.”
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There are two types of supply schedules as given below:
(1) Individual Supply Schedule:
It deals with the supply of a commodity by an individual producer or seller at different prices during a given period of time. The prices and quantity supplied in an individual supply schedule are not found actually in the market. It is based on the past reactions of a seller.
An individual supply schedule can be given as follows:
The individual supply schedule shows that an individual is ready to supply the wheat more with the increased or higher prices.
(2) Market Supply Schedule:
When all the quantity supplied of a commodity in the market at different prices by all individuals during a given period of time are added we will get a schedule known as market supply schedule. For example, there are three sellers of wheat. On basis of their individual supply schedule we can prepare the market supply schedule as given in Table 2.
The table shows the individual supply schedule of A, B and C sellers of wheat at different prices who are prepared to sell wheat. All these aggregated schedules has been shown in the last column of the table and it shows the quantity supplied of wheat in the market at different prices during a given period.
4. Supply Curve:
When a supply schedule is shown on a diagram we will get a curve known as supply curve. Professor Lipsey has defined, “Supply curve shows the quantity producers will wish to make and to offer for sale at various alternative prices of the product.”
On the basis of Table 1 we can draw the supply curve as given below:
In the diagram, price is shown on OX-axis and quantity supplied is shown OY-axis. SS is the supply curve showing upward trend. With the increase in the prices of wheat more quantity of wheat is being supplied. Hence, there is direct and positive relationship between the price of a commodity and its quantity supplied.
5. Reasons for Operating the Law of Supply:
The reasons for operating the law of supply are given below:
(1) Profit Increases with the Increase in Supply:
When the price of a commodity increases then more will be the sale of that commodity or more quantity of that commodity will be sold or supplied by the producers because it increases the profits of producers. In the long run, new producers enter in the industry and new techniques of production are adopted and all the factors of production are variable. On account of rise in prices producers will produce more in the long run and they will maximise the use of resources to the installed capacity during short period.
(2) Fall in Price Reduces the Profit:
When the prices are low it will reduce the profits of producers or sellers of a commodity and the supply is reduced. During short period the supply is reduced by reducing the use of various inputs and in the long run production is stopped. The supply is limited in case of perishable commodities during short period but durables can be stocked by the producers.
6. Exceptions to the Law of Supply:
There is a direct relation between the price of a commodity and its quantity supplied. The operation of the law is based on certain assumptions.
But there are some exceptions to the law of supply as given below:
(1) Future Expectations of Prices:
The law of supply does not apply when there is rise or fall of prices in future. In case of future rise in prices the supply is reduced while future fall in prices will increase the supply at present. Hence the law of supply will not operate. For example, supply of shares, debentures, etc.
(2) Goods of Arts:
Goods of arts will not increase or decrease with the increase or fall in their prices. Artist will not increase or decrease the supply of his articles on the basis of their prices.
(3) Auctionable Goods:
Those goods which are auctioned, the prices will not increase because the supply of such goods is predetermined. The law of supply does not operate in case of such goods.
(4) Supply of Labour:
The supply of labour is also not affected by the wage rate because the source of supply of labour is growth of population and after a point if the wage rate is raised workers would prefer to leisure rather than the work and on account of it the supply of labour will be a backward bending supply curve.
(5) Agricultural Products:
Agricultural products like oil seeds, pulses, etc., cannot be increased with the increase in their prices. During famine or heavy rains these products are in short supply and their price increase but are unable to raise their output. Indian agriculture is the gamble of monsoon. Hence the prices will not increase their supply.
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