What is Supply? Law of Supply and Supply Curve

  • Post last modified:12 February 2022
  • Reading time:10 mins read

What is supply?

Supply can be defined as that much quantity of commodity which a producer or seller is willing and able to sell at given price level.

Supply of the commodity is another important factor-influencing price of the commodity.

This definition implies that supply is not the total production but it represents only that much quantity, which is the seller is willing to sell as well able to sell at given price level. The concept of supply is different from that of stock.


Law of Supply

Marshall also stated the law of supply as follows: According to the law, if price of the commodity rises, supply of the commodity also rises because with rising price the seller enjoys more and more profits. On the other hand, with decline in price, profits of the seller also decrease because of which he is ready to sell less and less quantities.

Supply Curve

The relationship between supply and price can be explained with the help of supply schedule and supply curve.

Supply Curve

In the above diagram X‘ axis represents supply while Y‘ axis represents price of the commodity. S‘ is the supply curve representing different levels of supply at different prices. When price of the commodity is OP, supply is OM. As the price increases from OP to OQ, supply of the commodity increases from OM to OK. if the price of the commodity decreases by QP, supply of the commodity also decreases by KM.

Importance of Law of Supply

With the help of above explanations three importance are cleared:

  • There exist direct relationship between price and supply.

  • Supply curves slopes upwards from left to right.

  • The slope of the supply curve is positive.

  • Assumptions of the Law of Supply

The law of supply is based on following assumptions: ·

  • The cost of production remains constant. ·

  • The technology remains constant. ·

  • Government policies do not change.

  • The prices of substitutes and complementary good and services are constant. ·

  • Geographical conditions remain constant. ·

  • Tastes and habits of the people do not change. Exceptions to Law of Supply

Backward sloping supply curve

Law of Supply states that there exists direct relationship between price and supply. However, supply of labour is considered an exception to this law. This is because although up to certain limit labour supply is directly related to wages, after that limit it becomes inversely related to wages.

Labour is such a factor of production, which involves human element. The supply of labour not only depends on wages but also on willingness of the labour to work. The relationship of labour supply to price i.e. wages can be explained with the help of following diagram:

In this diagram, X-axis represents supply of labour and Y-axis represents 77 price paid to labour i.e. wages. LS is the labour supply curve. On the LS curve, SE part of the curve represents direct relationship between labour supply andwages. OP is the level of wages up to which if wages increase supply of labour will also increase and with decrease in wages labour supply also decreases.

Labour supply curve

On the other hand LE part of the LS curve represents inverse relationship between labour supply and wages i.e. level of wages increases from OP to OQ the labour is ready to work for less hour from OM to OJ. Thus, beyond certain limit of wage level i.e. OP as wages increases, supply of labour decreases and vice-versa.

Causes of Changes in Supply

We cannot attribute changes in supply to changes in price, because when supply changes, in consequence to a change in price, it is called extension and contraction and not increase or decrease.

In order to account for increase or decrease in supply, we have to discover the factors, which bring about a change in the very conditions of supply. in other words, we must ascertain why supply expands or shrinks irrespective of the changes in price.

The answer lies in the changes in the system of production. The following are some of the factors, which affect supply:

Natural Conditions

If rainfall is plentiful, timely and well distributed, there will be bumper crops. On the contrary, floods, droughts or earthquakes and other natural calamities are bound to affect production adversely. This is one set of conditions, which brings about a change in the supply.

Technical Progress

The volume of production or supply is also influenced by progress in the technique of production. in manufacturing industries, this is a very important factor. A new machine may have been invented, a new process discovered, a new material found, or perhaps a new use may have been found for a by-product.

The discoveries of synthetic dyes, artificial rubber and wool are some such discoveries or improvements in technique.

Change in Factor Prices

A change in the prices of the factors of production also brings about a change in the supply of the commodity. if the factors of production become cheap, the supply will increase and vice versa.

Transport improvements

Improvement in the means of transport reduces the cost and increases the supply of the product. Thus, conditions of supply change.

Calamities

Calamities like war or famine must also affect the supply of goods. We are very familiar with the shortage of commodities caused by war and the dislocation of production by famine. Even at higher prices, adequate supplies are not forthcoming.

Monopolies

Monopolists may deliberately increase or decrease the supply as it suits them. Thus, exercise of monopolistic power brings about a change in supply.

Fiscal Policy

The fiscal policy of the government also may affect the supply. For instance, higher import duty will restrict the supply and a lower duty will stimulate it.


FAQ

What is supply?

Supply can be defined as that much quantity of commodity which a producer or seller is willing and able to sell at given price level.
Supply of the commodity is another important factor-influencing price of the commodity.

What is law of supply?

According to the law, if price of the commodity rises, supply of the commodity also rises because with rising price the seller enjoys more and more profits. On the other hand, with decline in price, profits of the seller also decrease because of which he is ready to sell less and less quantities.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.