Supply curve ‘SS’ slopes upwards from left to right which has a positive slope. It indicates a direct relationship between price and quantity supplied. Market knowledge is the compass guiding producers through the intricate dance of supply and demand. This is the sixth assumption among the different assumptions of law of supply.
There is a direct relationship between the price of a commodity and the supply of the commodity. If the price of a commodity is high, then the supply of the commodity is also high. Similarly, when a commodity’s price decreases, the commodity’s supply also decreases. When your employer pays time and a half for overtime, the number of hours you are willing to supply for work might increase. Economics is a complex field that seeks to explain how societies allocate their limited resources to fulfill unlimited wants and needs.
So, producers increase the supply of the commodity by increasing the production. On the other hand, with fall in prices, supply also decreases as profit margin decreases at low prices. This fundamental economic concept helps us understand how producers respond to price changes in the marketplace. A rise in price induces the prospective producers to enter into the market to produce the given commodity so as to earn higher profits.
The law of supply states that the relationship between price and supply of a product. This third assumption of law of supply assumes a static technological landscape—no breakthroughs, no disruptions. The law of supply can be explained with the help of supply schedule and supply curve as explained below. Sellers are willing to offer more perishable commodities, such as fruits, vegetables, and other foods, even if prices are dropping. This occurs because sellers cannot keep such things for an extended period.
Change in Number of Firms:
The dynamics of supply are also influenced by market demand; for a product to be successfully sold, there must be sufficient demand from consumers. For instance, the release of a new video game may create high demand, leading to a temporary shortage as eager customers are willing to pay a premium. However, as the market stabilizes and supply catches up, prices may adjust accordingly to attract more buyers. Factors such as competition, variable costs, and broader economic conditions also play critical roles in shaping supply decisions. While the Law of Supply provides a foundational understanding of market behavior, it is essential to recognize that real-world complexities can influence its application. As a general rule, supply curve slopes upwards, showing that quantity supplied rises with a rise in price.
An auction sale takes place at that time when the seller is in financial crisis and needs money at any cost. Maximising profits is the primary goal of producers when they supply a good or service. Their profits grow when the price of a commodity rises without a change in costs. Therefore, by increasing production, manufacturers increase the commodity’s supply. On the other hand, as price fall, supply also declines since low price result in lower profit margins. It is observed in markets that when more price of commodities are offered to sellers.
Law of Supply Curve/Diagram:
The increase in taxes effects the investment and production and supply of goods decreases. If the global price of oil increases, oil companies will be motivated to extract and supply more oil to the market. This is because higher prices make oil extraction more profitable, leading to more investment in exploration, drilling, and production, which increases the overall supply of oil. In unitary elastic supply, the percentage change in the quantity supplied is exactly equal to the percentage change in price.
The law of supply states that a higher price for a good or service will lead producers to supply more of that good or service to the market. This is because businesses want to increase their profits. When they can get a higher price for something, they will produce more of it than they will of other, lower-priced goods and services. In the figure above, X axis represents quantity supplied and Y axis represents the price of the commodity.
It is a qualitative statement, as it indicates the direction of change in the quantity supplied, but it does not indicate the magnitude of change. Let us discuss important exceptions to the law of supply in detail. Yes, advancements can disrupt the assumed stability of production processes. By anchoring decisions in the present, this assumption avoids the slippery slope of what-ifs. The Law of Supply can be better understood with the help of the following table and graph.
- If price of a commodity decreases and cost of production also decreases, at the same time, the quantity supplied does not decrease and profit remains constant.
- Let’s discuss the assumptions of law of supply, exploring the nuances that make the law of supply tick.
- So the seller becomes ready to sell his goods at any offered price.
- Sellers are willing to offer more perishable commodities, such as fruits, vegetables, and other foods, even if prices are dropping.
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- If the global price of oil increases, oil companies will be motivated to extract and supply more oil to the market.
- If ten people want to buy a pen, and there’s only one pen, the sale will be based on the level of demand for the pen.
- This assumption grants them near-perfect awareness of market conditions.
However, there assumptions of law of supply are certain conditions where the law of supply is not applicable. These conditions are known as exceptions to the law of supply. In such cases, the supply of a product falls with the increase in the price of a product at a particular point of time.
Technology Remains Frozen in Time
In the beginning, when the price is Rs.10 per kg, quantity supplied by the seller is 1kg. As the price increases from Rs.10 per kg to Rs.20 per kg and then to Rs.30 per kg, the quantity supplied by the seller also increases from 1 kg to 2 kg and then to 3 kg respectively. In the figure (5.1) price is plotted on the vertical axis OY and the quantity supplied on the horizontal axis OX. The four points d, c, b, and a show each price quantity combination.
A price increase results in a smaller proportional increase in the quantity supplied. The supply curve is steeper, showing that producers cannot easily adjust their supply to price changes. In this case, any small change in price will result in an infinite change in the quantity supplied. Producers are willing to supply any amount of a good at a specific price, but none at prices below that.
The production of these products is dependent on so many factors which are uncontrollable, such as climate and availability of fertile land. To understand the law of supply, it is important to discuss the concepts of demand schedule and demand curve. Let’s discuss the assumptions of law of supply, exploring the nuances that make the law of supply tick.
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These limitations are crucial for a more nuanced perspective on supply behavior in the real world. When the price of a commodity increases, the seller increases the quantity supplied. The profit of seller increases and the aim of seller is to profit maximization. If the quantity of natural resources (minerals, gas, coal, oil etc) increases, the cost of production decreases. “Other things remaining the same, if the price of a commodity increases its quantity supplied increases and if the price of a commodity decreases, quantity supplied also decreases”. In this case, the quantity supplied is less responsive to price changes.
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For example, a business will make more video game systems if the price of those systems increases. The opposite is true if the price of video game systems decreases. The company might supply 1 million systems if the price is $200 each, but if the price increases to $300, they might supply 1.5 million systems. According to the law of supply, the quantity supplied increases with a rise in the price of a product and vice versa while other factors are constant. The other factors may include customer preferences, size of the market, size of population, etc. Raw materials, labor, energy—these are the lifeblood of production.
When a seller wants to clear its old stock in order to store new goods, he may sell large quantity of goods at heavily discounted price. If ten people want to buy a pen, and there’s only one pen, the sale will be based on the level of demand for the pen. The supply function requires more pens, which generates more production to meet demand. Following are the causes of positive slope of supply curve.
However, in certain cases, positive relationship between supply and price may not hold true. The supply curve slopes upward because, over time, suppliers can choose how much of their goods to produce and later bring to market. This law is built on several key assumptions that help explain how producers respond to changes in price.
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