Assumptions of Law of Supply

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. It is assumed that there is no change in the cost of production .A change in cost of production will affect the profits of the seller. Therefore less quantity will be supplied at the same price. This graph is showing when the price is increasing and as the price increases, this will give incentives to firms producing goods or services to produce more for greater profit. Initially, the price was at 80 and the firm was supplying 60 units, when the price had increased to 116, the firms conclude to make more units up to 70.

assumption of law of supply

At the maximum price 16 he is prepared to sell 60 kg of wheat. Thus as price rises supply extends and as price falls, supply contracts. On the basis of supply schedule a supply curve can be drawn. In other words, law of supply establishes a positive relationship between price and supply. In the figure above, X axis represents quantity supplied and Y axis represents the price of the commodity.

It is also assumed that technique of production does not change. If better methods of production are invented, profit increases at the previous price. The sellers increase supply and law of supply does not operate.

In such cases, the supply of a product falls with the increase in price of a product at a particular point of time. Assumes that the policies of the government remain constant. If there is an increase in tax rates, then the supply of product would decrease even at the higher price.

It incorporates both the law of supply and the law of demand. In the above diagram, quantity supplied is measured along OX-axis and price along OY-axis. It shows the positive relation between price and quantity supplied. The upward sloping of supply curve SS shows that at lower price quantity supplied is less and at high price quantity supplied is more.

Therefore, for the application of law of supply, it is necessary that government policies should remain constant. As a general rule, supply curve slopes upwards, showing that quantity supplied rises with a rise in price. However, in certain cases, positive relationship between supply and price may not hold true.

What Factors Affect Supply?

By plotting various combinations of price and quantity supplied we derived points A, B, C, D, E curve and joining these points we find an upward sloping i.e. The positive slope of the supply curve SS1 establishes the law of supply and shows the positive relationship in between price and quantity supplied. The law of supply is also a fundamental principle of economic theory like the law of demand. It was introduced by Prof. Alfred Marshall in his book, ‘Principles of Economics’ which was published in 1890. The law explains the functional relationship between price and quantity supplied. Refers to the fact that the supply of a product decreases instead of increasing in present when there is an expected increase in the price of the product.

For example, supply of rare articles like painting of Mona Lisa cannot be increases even if the prices are increased. Agricultural Goods – The sale of agricultural goods are not subject to the law of supply since their production depends on climatic condition. Also, these are perishable goods and need to be sold in a certain time period after which they will have no value. Therefore their supply might increase even at a lower price. While discussing the topic we should know the difference between stock and supply.

assumption of law of supply

The production of goods decreases due to decrease in investment. The seller become ready to sell his perishable goods at any offered price. 5- No change in the seller’s expectations regarding future prices. The law of supply says that as the price of an item goes up, suppliers will attempt to maximize their profits by increasing the number of items for sale. There are certain commodities which are in nature of substitutes and complementary.

What Is the Law of Demand?

Assumes that there is no change in the scale of production. This is because if the scale of production changes with a period of time, then it would affect the supply. In such a case, the law of supply would not be applicable.

It is also an exception to the law of supply example. When there is high competition in the market, the sellers assumption of law of supply may sell goods in high quantities at low rates. It refers to a situation where the law of supply does not hold.

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. The goods that are precious or artistic generally have a limited supply. The supply of these goods cannot be raised according to the rising prices or demand. Hence, if the price of the goods increases, the supply of such rare goods cannot be raised.

For example a firm producing medicines and rat poison, gives more importance to the production of medicines. 2) It depends on the prices of its substitutes and complementary goods. The supply of a good is determined by the following factors. is a free service that lets you to preserve your original articles for eternity. 6- No change in the tax and subsidy policy of the product.

Assumptions of the Law of Supply

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. In this situation traders are in a hurry to sell their goods. The preferences of every individual buyer remain unchanged.

  • In addition, the number of suppliers available, the level of competition, the state of technology, and the presence of government support or restriction will play important roles.
  • If, due to unforeseen changes in weather, the production of agricultural products is low, then their supply cannot be increased even at higher prices.
  • The supply of agricultural product is affected adversely by weather, natural calamities like flood, cyclone etc.
  • The commodity of products is measurable and accessible in small units.
  • Several commodities fall under exceptions like farm produce, economic, perishable commodities, business change, and more.

It follows the law of diminishing returns, eroding as output levels increase. When your employer pays time and a half for overtime, the number of hours you are willing to supply for work increases. Our mission is to provide an online platform to help students to discuss anything and everything about Economics.

This will increase the overall supply of televisions in the market. At some point, the abundant supply will tend to cause prices to moderate and fall. If the number of firms producing commodity increases, the market supply curve shifts downward. In the short run the existing firms reap abnormal profit. But lured by the abnormal profit the competitive firms enter the market to produce the same commodity. This raises the supply; likewise the competitive firms leave the market due to loss.

Method of production affects the supply of a commodity by reducing the cost of production. Due to modern method of production cost of production diminishes and the price of the commodity almost remains constant. Being lured by the windfall profit producers produce more and offer more for sale. In this diagram price is taken on Y axis and quantity supplied is measured on X axis.

Similar to Law of supply (

Because businesses seek to increase revenue, when they expect to receive a higher price for something, they will produce more of it. 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. No change in the tax and subsidy policy of the products. We’ve updated our privacy policy so that we are compliant with changing global privacy regulations and to provide you with insight into the limited ways in which we use your data.

On the other hand, if the seller expects further rise in price of the commodity he will not sell more even if the price level is high. Labour supply is the total number of hours that workers work at a given wage rate. In the case of labour, as the wage rate rises the supply of labour would increase. Supply of labour falls with a further rise in wage rate and the supply curve of labour bends backwards.

The chart below depicts the law of supply using a supply curve, which is upward sloping. Each point on the curve reflects a direct correlation between quantity supplied and price . So, at point A, the quantity supplied will be Q1 and the price will be P1, and so on. Further, the law assumes that there are no changes in the prices of other products. Under this situation and circumstances, more of the product in consideration may not be supplied, despite the rising prices.