Pages

▼

Law of Supply and Its Exceptions

Law of Supply


The quantity supplied, other things remaining equal, varies directly with price. The supply of a commodity increases with increase in price and decreases with decrease in price. This tendency is called the law of supply. When the price of a commodity increases, there is an increase in profit. This induces firms to produce and sell more quantity.

The law that supply varies directly with the price is based on several assumptions:
  1. There is no change in the price of substitutes.
  2. There is no change in the cost of factors of production.
  3. There is no expectation of any change in prices in future.
The law of supply can be explained by the help of supply schedule presented below:
Supply Schedule
Price ($ per kg)
Quantity Supplied (kg. per month)
2
4
6
8
10
12
1
10
20
30
35
37

As shown in table, when price is $2 per kg, the quantity supplied is 1kg. When price increases to $4, quantity supplied increases to 10kg. Likewise when price increases to $6, quantity supplied increases to 20kg and so on.

The law of supply can be explained by the help of figure below:

Law of Supply

In the figure, OX axis represents quantity supplied and OY axis represents price of the commodity. SS is supply curve, which has been derived by joining different price-quantity combinations of above table. The supply curve is upward sloping which means that more is supplied in higher prices. The quantity supplied increases from 1kg to 10kg, 20kg, 30kg, when price increases from $2, $4, $6 and $8 respectively.

Exception to the Law of Supply

Some of the exceptions to the law of supply are as follows:
  1. Auction sale: The law of supply does not hold goods in auction sale. Auction sale may be made when a seller is badly in need of money. Hence, he will be prepared to sell all his goods at whatever the price offered. But even in auction sale, goods are sold to the highest bidder, which may be called the operation of law of supply.
  2. Clearance sale: The shopkeepers offer the clearance sale at heavily discounted price so as to get rid of the old stock. Hence, the law of supply does not hold good, since the shopkeepers attempt to sale more at lower price.
  3. Expectation of sellers: If the sellers expect that there will further fall in price in future, they will try to sell more even if price falls. Likewise, if they expect the further rise in price, they will not sell more even if the price is high. The sellers attempting to hoard food grain before the cultivating season and sell before harvesting season proves this.
  4. Fear of being out of fashion: The taste and fashion change from time to time. The advanced technology has brought rapid change in taste and fashion. This makes some of the goods out of fashion. Hence, if the change in fashion is expected, the sellers try to sell more at lower prices.
You may also like to read:

No comments:

Post a Comment