Law of Supply:
The law of supply, or more appropriately ‘supply hypothesis’ gives us the relationship between price and supply of the commodity.
Statement:
The law of supply states that, other things remaining constant, the quantity of any commodity that firms will produce and offer for sale rises with a rise in its price and falls with a fall n its price.
In other words, the law of supply states that, higher the price, the larger is the quantity supplied and lower the price, the smaller is the quantity supplied. It means, quantity supplied of a commodity is positively related to its price.
Assumption :
- The income of buyers and sellers remain unchanged.
- The commodity is measurable and available in small units.
- The cost of factors of production does not change over a period of time.
- The time period under consideration ids short.
- The technology used remains constant.
- The producer is rational. Taxation policy of government do not change over time.
- No change in the goals of the firm.
- No change in the sellers expectations regarding future prices.
- No change in the price of other goods.
Illustration of the Law of Supply:
Law of supply can be illustrated with the help of ‘Supply Schedule’ and ‘Supply Curve’
A. Supply Schedule :
The tabular representation of the law of Supply.
It shows the relationship between the price of the commodity and the quantity that would be supplied.
There are two types of schedule :
1. Individual supply schedule
2. Market supply schedule
1. Individual Supply Schedule :
The individual supply schedule refers to the table which shows various quantities of a commodity that an individual producer would produce and offer for sale at different prices during a particular period of time.
Supply Schedule of good ‘X’:
|
S N |
Price (in Rs /Kg) |
Quantity Supplied of good ‘X’ (Kg /month) |
|
1. |
10 |
5000 |
|
2. |
15 |
10000 |
|
3. |
20 |
16000 |
|
4. |
25 |
25000 |
|
5. |
30 |
35000 |
|
|
|
|
2. Market Supply Schedule :
It refers to the table which shows various quantities of a commodity that all the firms are willing to supply for different prices during a particular period of time.
Market Supply Schedule for Good ‘X’:
|
SN |
Price (Rs/kg) |
Quantity Supplied by Firm ‘A’ (kg/month) |
Quantity Supplied by Firm ‘B’ (kg/month) |
Market Supply (Kg/ month) |
|
1. |
10 |
5000 |
4000 |
9000 |
|
2. |
15 |
10000 |
8000 |
18000 |
|
3. |
20 |
14000 |
11000 |
25000 |
|
4. |
25 |
17000 |
13000 |
30000 |
|
5 |
30 |
19000 |
14000 |
33000 |
B. Supply Curve:
A supply curve is a diagrammatic presentation of the law of supply.
It gives the same information that a supply schedule gives but graphically.
Like supply schedule supply curves are also of two types:
1. Individual Supply Curve:
The curve which shows various quantities of a given commodity which an individual producer or a firm is willing to supply at different prices during a particular period of time, assuming no change in factors other than the price affecting the supply of the commodity.
An individual supply curve of good ‘X’:
2. Market Supply Curve :
The curve which shows various quantities of a commodity which all the producer are willing to produce and offer for sale at different prices during a particular period of time, assuming that factors other than price of the good are given.
A Market supply Curve of good ‘X’ :
Derivation of market supply curve from individual supply curves :
Question :Derive a market supply curve from two hypothetical individual supply schedule.
Answer: For any given commodity ‘X’ the individual supply schedule of firm ‘A’ and ‘B’ may be:
Supply schedule of commodity ‘X’ by firm ‘A’ and ‘B’:
|
S N |
Price in Rs/kg |
Quantity Supplied by Firm ‘A’(kg/month) |
Quantity Supplied by firm ‘B’ (kg/month) |
|
1. |
10 |
5000 |
4000 |
|
2. |
15 |
10000 |
8000 |
|
3. |
20 |
14000 |
11000 |
|
4. |
25 |
17000 |
13000 |
Therefore the individual supply curve for commodity ‘X’ by firm ‘A’ and firm ‘B’ are as follows :
Individual Supply Curve by firm ‘A’:
Individual Supply Curve by firm ‘B’:
Derivation of Market Supply curve by individual supply curves:
To derive the market supply curve for commodity ‘X’
– The supply curve SSA of the firm A and curve SSB of the firm B is drawn.
– derive the market supply schedule by adding the individual supply schedule horizontally.
– Draw the market Supply curve SSM by aggregating the individual supply curve SSA and SSB of the two firms A and B.
-We have added the two curves SSA and SSB horizontally because we show the quantity supplied horizontally.
Market Supply Schedule for commodity X may be –
|
SN |
Price Rs/kg |
Quantity supplied by Firm ‘A’ |
Quantity Supplied by firm ‘B’ |
Market Supply |
|
1. |
10 |
5000 |
4000 |
9000 |
|
2. |
15 |
10000 |
8000 |
18000 |
|
3. |
20 |
14000 |
11000 |
25000 |
|
4. |
25 |
17000 |
13000 |
30000 |
Market Supply Curve for commodity X:
Explanation of the Law of Supply :
# A typical supply curve slopes upward from left to right. It means it has positive slope.
# The supply curve is drawn on the basis of ceteris paribus i.e., other things remaining the same.
# The positive sloping curve indicates the direct relation between the price of the commodity and the quantity supplied.
Explanation :
1. When the price of the commodity is higher, the profit that can be earned also be larger.
Larger profit will induce the producer to produce and supply more for sale.
This way the price of the commodity serve as an incentive for the producer to supply it.
Higher the price, the greater is the incentive for the producer to produce and supply more in the market.
2. The positive sloping of the supply curve is also caused by the marginal cost of production.
Marginal cost of production increases with the increase in the amount of production.
This implies that the producer would be prepared to produce and supply a large quantity only at a higher price so as to cover the higher cost of production.
Question: Why does supply curve slope upward to the right ?
Answer: The supply curve slopes upward means there is a positive relationship or direct relation between the quantity supplied and the price of the commodity.
Reasons for upward sloping of supply curve:
1. Price determines the amount of profits:
The higher the price of the commodity the larger is the profit that can be earned.
Thus, the higher price will induce the producers to supply more to earn larger profit.
2. The rise in the marginal cost of Production:
The positive slope is also caused by the rise in the marginal cost of production.
The marginal cost of production increases with the increase in the amount of production.
This implies that the producers would be prepared to produce and supply a larger quantity only at a higher price, to the higher cost of production.
3. A rise in price would give incentive to new producers:
The higher price of a commodity induces other producers to produce this commodity to earn higher profits.
At higher price more firms are willing to produce the commodity given.
This leads to increase in the quantity supplied of a commodity.