Micro Law of Supply

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Micro Economics and Policy Analysis

MECHANICS OF LAW OF SUPPLY; and SUPPLY CURVE

Donna Gozun
National Labor Relations Commission
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Definition of Law of Supply


There is the direct relationship between the price of a commodity and its quantity offered for sale over a specified period
of time. When the price of a goods rises, other things remaining the same, its quantity which is offered for sale increases,
and as price falls, the amount available for sale decreases.

Explanation of Law of Supply


The law of supply, in short, states that ceteris paribus sellers supply more goods at a higher price than they are willing at
a lower price.
P ↑ Qs ↑

P ↓ Qs ↓
where P = Price
Qs = quantity supplied

Producers will spend more on making a product, if they expect to make more money on it and it increases revenue. At a
higher price, suppliers devote more resources to a product, which results in a greater quantity supplied.

Supply Function
The supply function is now explained with the help of a schedule and a curve.

Market Supply Schedule:

Market Supply Schedule of a Commodity:


(In Dollars)

Px 4 3 2 1

QxS 100 80 60 40

In the table above, the produce are able and willing to offer for sale 100 units of a commodity at
price of $4. As the price falls, the quantity offered for sale decreases. At price of $1, the quantity
offered for sale is only 40 units.
Law of Supply Curve/Diagram
The market supply data of the commodity x as shown in the
supply schedule is now presented graphically.

In the figure, 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. The supply curve SS/ slopes upward from left to right indicating
that less quantity is offered for sale at the lower price and more at higher prices by the sellers not supply curve is usually
positively sloped.

Example of Law of Supply


The law of supply is based on a moving quantity of materials available to meet a particular need. Supply is the source of
economic activity. Supply, or the lack of it, also dictates prices. Cost of scarce supply goods increases in relation to the
shortages. Supply can be used to measure demand. Oversupply results in lack of customers. An oversupply is often a
loss, for that reason. Undersupply generates a demand in the form of orders or secondary sales at higher prices.
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.
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ASSUMPTIONS OF LAW OF SUPPLY
1. Nature of Goods
If the goods are perishable in nature and the seller cannot wait for the rise in price. Seller may have to offer all of his
goods at a current market price because he may not take risk of getting his commodity perished.

2. Government Policies
A government may enforce the firms and producers to offer production at prevailing market price. In such a situation
producer may not be able to wait for the rise in price.

3. Alternative Products
If a number of alternative products are available in the market and customers tend to buy those products to fulfill their
needs, the producer will have to shift to transform his resources to the production of those products.

4. Squeeze in Profit
Production costs like raw materials, labor costs, overhead costs and selling and administration may increase along with
the increase in price. Such situations may not allow the producer to offer his products at a particular increased price.
EXCEPTIONS TO LAW OF SUPPLY
1. Change in business
It may happen that the seller may plan to enter into an entirely new business by exiting the current one. So when the
present business is on the verge of closure then the seller may sell his goods at lower prices to clear them off. So here
too the law of supply is not being followed.
2. Monopoly
When a small number of producers control the supply of the market then the law of supply may not operate. For
example, in the case of monopoly (single seller) may not necessarily offer a larger quantity supplied even though the
price of goods is higher. Market control by the monopoly allows it to set the market price based on demand in the
market.
3. Competition
Other market structures like an oligopoly and monopolistic competition may be facing more competition, therefore
offering to sell more quantities at lower prices and negating the law of supply.
4. Perishable Goods
In cases of perishable goods, the supplier would offer to sell more quantities at lower prices to avoid losses due to
damage to the product.
5. Legislation Restricting Quantity
Suppliers cannot offer to sell more quantities at higher prices where the government has put some regulations on the
quantity of the good to be produced or the price ceiling at which the good is to be sold in the market.
6. Agricultural Products
Since the production of agricultural products cannot be increased beyond a certain limit, the supply can also not be
increased beyond this limit even if the prices are higher; the producer is unable to offer more quantities.
7. Artistic and Auction Goods
The supply of such goods cannot be increased or decreased easily according to its demand. Thus, it is difficult to offer
more quantities even if the prices shoot up.
8. Out of fashion goods
When goods are in fashion then the sellers can sell at a high price. But there are some goods that go out of fashion and
are no longer in vogue. Such goods are sold by the sellers at low prices in order to clear these goods.
9. Economic Slowdown
The businesses pass through different phases and the sellers have to adapt to these business-related changes. During the
low economic phases, the sellers may not have an advantage of incremental prices and hence during such tough times,
they sell goods even when they do not witness price rise in order to recover costs. So the law of supply is not applicable
in this case also.
10. Immediate requirement of funds
The seller may face a time when there is in immediate need of funds. In this situation, he may supply the goods in the
market even at lower prices.
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REFERENCES:

https://www.investopedia.com/terms/l/law-of-supply-demand.asp
https://economicsconcepts.com/law_of_supply.htm
https://www.toppr.com/guides/business-economics-cs/basic-elements-of-demand-and-supply/exceptions-law-supply/

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