Law of Supply Meaning, Schedule, Curve, Assumption & Limitations

Fri, 08/15/2014 - 00:09 -- Umar Farooq

Meaning of Supply

In economics supply and demand are two basic concepts and backbone of market economy. In terms of economics supply means “an amount of a commodity or service which sellers are willing and able to sell at a given price during a given period of time”.

While discussing the topic we should know the difference between stock and supply. Supply means the quantity of goods which sellers are willing to sell in market at a given price. Stock means quantity of a commodity which exists in the market but not offered for sale at a given price.

Law of Supply

The law of supply states that price and quantity supplied are inversely related. It states that “other things remaining the same the quantity supplied of a commodity extends with a rise in its price and contracts with a fall in its price”.  In other words the quantity supplied changes directly with price. The law explains a definite relationship between the prices of a commodity and its quantity supplied.

Supply Schedule

Price ($)

Quantity

1

12

2

28

3

42

4

52

5

60

 

A supply schedule shows the relationship between price and quantity supplied, when the price if $1 quantity supply is 20 items and when the price increases to Rs. $50 the quantity supplied increased to 100 items thus the table show that quantity supplied of a commodity change directly with its price.

Supply Curve

In this diagram price is taken on Y axis and quantity supplied is measured on X axis. If I asked why is the supply curve upward slopping? Answer is simple, lets SS is a supply curve slope upward from left to right because a direct relationship between price and quantity supplied. Why does a supply curve have a positive slope? It is because of the relationship between price of a commodity and its quantity supplied. In the law of supply “other things remaining the same” is an important statement. It means all the factors except price which can occur change in supply.

Assumptions

  1. Price of factors of production. If there is a change in prices of the factors of production then supply of a commodity may change at same constant price e.g. an increase in wages of labour may cause of decrease in supply of a commodity at the same price.
  2. Change in Technology. When advance technology is available then it became possible to increase the supply of a commodity at the same constant price, because with improvement of technology the cost of production usually decreases.
  3. Change in Weather. Supply of agricultural products usually changes with change in weather. When weather is suitable for agriculture then more output is obtained and therefore, supply of an agricultural goods increase otherwise decrease.
  4. Government Taxes. Production activities and supply of different goods very much depends upon the system of taxation. If heavy taxes are imposed on production of different goods then their supply my decrease. On the other hand concession in tax may help to increase supply at the same price.

What are the Limitations

In some circumstances, this law does not apply. These are called exception and limitation of law.

  1. War period. In this situation traders are in a hurry to sell their goods. So they sell at less prices.
  2. Need for Money. Sometimes, seller need money, so they sell goods on low prices and this law does not apply.
  3. Future Fear. If traders think that prices will be reduced in future, they try to sell the goods at low prices at present even though goods prices are decreasing on.
  4. Transferability. If a trader works to hit from one place to another place then he will sell his goods on low prices. In all the above situations this law will not apply.