Various economists have extensively studied the behavior of sellers and producers and firms. As a result they arrived at a generalization of their behavior called the Law of Supply.
Law of Supply
Law of supply states that there is a direct relationship between price and quantity supplied of the commodity, keeping other factors constant i.e. ceterus paribus.
We know that price is a dominant factor in determining the supply of a commodity. As price of the commodity increases, there is more supply of that commodity in the market and vice versa. This behavior is studied under the law of supply.
While stating the law of supply, the phrase ‘keeping other factors constant’ or ‘ceterus paribus’ are used. This phrase is used to cover the following assumptions on which the law is based.
- Price of other goods is constant.
- There is no change in the state of technology.
- Prices of factors of production remain the same.
- There is no change in taxation policy.
- Goals of the producer remain the same.
The above given graph and table clearly show that more and more units of a commodity are being offered for sale as the price of the commodity is increased. The supply curve SS slopes upwards from left to right, indicating a direct relationship between price and quantity supplied.
Features of Law of Supply
- It states the positive relationship between the price of a commodity and its supply assuming that there are no changes in other factors.
- The law of supply is a qualitative statement. It does not say anything about the quantity of increase in the supply of the commodity with a certain increase in price. It does not indicate the magnitude of change.
- It also does establish any proportional relationship between the price of the commodity and its supply.
- The law states a single sided approach where it talks about the change in supply due to the change in price but does not say anything about the change in price due to the change in supply.
Exceptions to the Law of Supply
As a general rule, the supply curve slopes upwards showing that the quantity supplied rises with a rise in price. However, in certain cases,positive relationships between supply and price may not hold true. The various exceptions to the law of supply are –
- Future Expectation – If sellers expect a fall in price in the future, then the law of supply may not hold true. In this situation the sellers will be willing to sell even more a a lower price since they expect the price to fall even further therefore increasing their losses.
- 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.
- Rare articles – Rare, artistic and precious articles are also outside the scope of the law of supply. For example, supply of rare articles like painting of Mona Lisa cannot be increases even if the prices are increased.
- Backward Countries – In economically backward countries, production and supply cannot be increased with increase in prices due to shortage of resources.