Understand the Relationship: Law of Supply

The concepts of law and supply are the driving factors behind the progress of any economy.  These concepts have various theories, laws and factors attached with them that need to be understood to understand the curves associated with these concepts. 

For this purpose, one usually needs in- depth research or proper education guidelines for the subject of Economics. 

Supply of a commodity is the quantity of a commodity which is produced by the producers or sellers at their will and which they offer for sale at a particular price for a given period of time.

 It is a desired quantity that shows how much producers are selling at their will and not how much they would actually sell. Supply is always expressed at a particular price, without price, quantity supplied will be considered absurd. As supply is measured over a period of time, it is known as a flow concept. For example, per day, per week, per month or per year.

Types of Supply: –

  • Individual supply: The quantity of a commodity that is produced by a single seller at his own will and offered for sale at a specific price during a given period of time, is known as individual supply. For example, supply of cell phones by a single producer like Samsung.
  • Market supply: Market supply refers to that quantity of a commodity which is produced by all the producers at their will and offered for sale at a particular price during a particular period of time. For example, supply of cell phones by all the producers, that is, Samsung, Apple, etc.
  • Intended supply: Intended supply refers to the entire amount of commodity produced by a producer at any given time which is ready to be sold in a market. For example, a producer producing 100 units of commodities is considered as intended supply.
  • Actual supply: The quantity of a commodity which a producer is willing to produce and offer for sale at a particular price during a particular period of time. For example, a producer supplies 75 out of 100 units produced, is considered as actual supply.

Determinants of supply: –

  • Price of the commodity: Larger quantities of a commodity will be supplied at a higher price and smaller quantities will be supplied at a lower price.

 This will be so because higher is the per unit profit when the price is higher at a given per unit cost of production. The higher profit would motivate the firms to supply more in order to earn higher profits. 

  • Input prices: Given the price of a commodity, a higher cost of production reduces the profit margin. This will lead to a lower amount of output that firms will produce and offer for sale at a given price level. A fall in the input prices and therefore, a fall in the cost of production will have the opposite effects on supply.
  • Price of related commodities: Supply of a commodity depends upon the price of related goods. The producer always has a possibility of shifting from one commodity to another commodity which we find more profitable to produce.
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 For example, if the price of rice increases, price of wheat remaining same, producers will find it more profitable to produce rice rather than wheat. Hence, supply of rice will increase, and supply of wheat will fall. 

Law of supply tells us that other things remaining constant, the supply of any commodity which is supplied by a firm at his own will and offer for sale increases with a higher price and decreases with lower price.

Explanation of the Law: 

The explanation reveals why the supply curve has a positive slope and price and quantity supply ahs a direct relationship. The explanation are as follows:

  • Higher profitability: As the level of price determines the amount of profit, as price of commodity increases, the profitability of producer increases, and producer supply is more. As the price of the commodity falls, the profitability of the producer decreases, and producer supply is less.
  • Marginal cost of production: As the producer increases the production of a commodity, marginal cost of production increases.

 Therefore, producer will only be supplying at a higher price in order to maintain the same rate of profitability. If producer supplies at a lower price, it will decrease his profitability due to increasing marginal cost of production.

  • Increase in number of producers: A rise in price would not only encourage existing producers but it will also motivate other prospective producer to produce a commodity in order to take advantage of higher profits. If price of a commodity decreases, profitability falls and producers will be discouraged from producing a commodity therefore, the supply falls at lower price.

Exceptions to the law of supply: –

  • Vertical supply curve: There are certain commodities like classical painting, old manuscripts, rare postage stamps, old coins, etc. whose supply cannot be increased with any change in price of commodity.

The supply of certain commodities like agricultural products is fixed in the short-run and can only be increased in the long-run. Therefore, these commodities have perfectly inelastic supply.

  • Backward bending supply curve: There are certain cases where the supply of a commodity decreases with increase in price of a commodity. For example, in case of labor, when his wages are increased, the amount of work done by labor decreases as he will devote his time more towards leisure. 

These concepts can be used to gain an effective assignment help to understand the economy and its various functions. Therefore, these were the basic concepts about supply and its different forms and theories, its different types, that are important to be understood along with the concepts of demand.

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