Law of supply: Definition, Schedule and curve. Exceptions to the law.

 

THE LAW OF SUPPLY

Let us assume that the overall objective of a producer is to maximize profit which is the difference between total revenue and total cost. Total revenue is of the product multiplied by the quantity sold. Total cost is the average cost of production multiplied by the quantity produced.

A higher price would mean more profits, provided there is no change in Other factors influencing the supply. Therefore, a producer will be willing to supply more if he expects to get a higher price for his product. Similarly, a producer will be willing to supply less, if he expects to get a lower price for his product: So, we observe a direct relationship between the price and the quantity- supplied of a commodity. This direct relationship between price and supply o: a product is recorded as 'Law of Supply'. The law states that as the price of a commodity increase, the quantity supplied, per unit of time, of that commodity also increases and vice versa, assuming all other factors influencing, supply remain constant. The law of supply holds good only on the assumption ‘other factors remaining constant'.

In this direct relation change between the price and the supply of a commodity, the change in supply is caused by the change in price such that change in price is the cause and change in supply is the effect. We can state the same thing differently by saying that price is taken as an independent variable while supply is taken to be a dependent variable. It is important to understand that the statement “Price rise Leads to supply rise” is true and the statement that “Supply rise leads to price rise” is false.

The Supply Function

The supply function is a shorthand expression of the various factors affecting the supply of a commodity. Thus, the supply of a commodity can be put as a function of the price of that commodity, the price of all other commodities; the prices of factors of production, technology, the objectives of producers, and other factors. This relationship must be expressed with the help of the following symbols. Q,S = f(P1, P2, P3….Pn,  F1... Fn. T, 0, of where Q, S stands for the supply of commodity 1, P1 is the price of that commodity, P2, P3...Pn is the prices of all other commodities, F1….Fn is the prices of all factors of production. T is the state of technology, O is the objective of the producer, and OF stands for other factors influencing supply. In the Law of Supply, we are only concerned with the relation between Q, S, and f(P1), other things remaining constant. In specific terms what we state in the law of supply is that the quantity of a commodity produced and offered for sale will increase as the price of the commodity rises and decreases as the price falls other things remaining constant.

The Supply Schedule

A supply schedule shows different prices of a commodity and the quantities which a producer is willing to supply, per unit of time, at each price, assuming other factors influencing the supply to be constant. A supply schedule of a product based on imaginary data is given in Table 1 illustrating the relationship between price and quantity supplied as given by the law of supply.

Table 1

A Supply Schedule of a Pen Product

 

Price(in Rs.) per Pen	Quantity supplied(in thousand) per month
2	25
3	40
4	50
5	60
6	70

 

 

The schedule presented in Table 1 shows that at a price of Rs 2 per pen the producer is willing to supply 25 thousand pens per month. And at a higher price of Rs 3 per pen, he is willing to supply 40 thousand pens per month and as the price of pens keeps rising he is willing to supply more and more quantity of pens per month as shown in the supply schedule. This supply schedule has been so drawn as to depict a direct relationship between price per pen and quantity supplied of pens month.

The Supply Curve

Look at Figure 1 where the data from Table 1 has been plotted. Here prices plotted on the Y-axis and quantity supplied on X-axis.

Graph 1

Supply Curve

The graph shows that point labeled a, for example, gives the same information that is given on the first row of the table; when the price of pens is Rs 2 per pen, 25,000 pens will be produced and offered for sale per month. Similarly, point b, c, d, and on the graph correspond to the row 3rd, 4th, 5th, and 6th of table 1 respectively.

The supply curve S is a smooth curve drawn through the five points a, b, c, d, and e. This curve shows the number of pens that will be produced and offered for sale at each price.

in short, the supply curve for a product depicts the direct relationship between the price of that commodity and the quantity producers wish to produce or sell at that price. This curve is drawn on the assumption that all other factors (other than the price of the product) that influence supply are constant (i.e. they remain unchanged). The upward slope of the supply curve indicates that the higher the price, the greater the quantity producers will supply. If the supply curve is extended to the Y-axis, it may or may not pass through O. If it passes through O, it shows that the quantity supplied is zero at zero price; if it does not pass through zero, it shows that unless the price rises up to a point, (indicated by a point not shown in Figure 1 at which supply curve cuts the Y-axis) quantity supplied will remain zero. The upward-sloping supply curve is just a diagrammatic representation of the law of supply.

 

Exceptions to the Law of supply

Generally speaking, the law of supply indicates a ditto relation between the puce and the quantity supplied. There are some exceptions to the law of supply. Some of the exceptions are given below:

1-      Non-maximisation of profits:

 

 In some cases, the enterprise may not be pursuing the goal of maximization of profits. In that case, the quantity supplied may increase even when the price does not rise. For example, if the firm wants to maximize sales even if the price remains unchanged, it may like to increase sales so that total revenue can be increased. Sometimes, the firm may be interested to maximise profits in the long run; in the short run, it may pursue some other goals. Similarly, if a firm is controlling a number of companies, it is the profits of all companies taken together which may be sought to be maximized so that for different products produced, the law of supply may not apply for each product.

2-      Factors other than price not remaining constant:

 

 The law of supply was stated on the assumption that factors other than the price of the commodity remain constant. In reality, we notice that factors other than the price of the product may not remain constant. For example, the quantity supplied of a commodity may fall at a given price if prices of other commodities show a tendency to rise. The change in the state of technology can also bring about a change in the quantity supplied of a commodity even if the price of that commodity data does not undergo a change.