Law of Supply

The law of supply states that supply is directly or positively related to price, other things remaining constant. It means if price rises, supply increases and if price falls, supply decreases.
Assumptions:

1. Prices of inputs are constant
2. Resource is static.
3. There is no change in tax and subsidy.
4. There is no change in level of technology
5. There is no change in availability of substitutes

Law of supply can be explained with the help of table and figure as following

In the above table, when price is Rs 10 per kg, supply is 500 kg per month. If the price rises to Rs 15, supply increases to 1000 kg. If the price further rises to Rs 20, supply further increases 1500 kg per month. This is because of more benefit or profit to the firm at higher price than at lower price. If we represent the quantities of supply with respect to prices, we obtain an upwardly sloped curve.

In the above figure, upwardly sloped curve is the supply curve. It shows the supply varies positively with price. Supply curve has positive intercept. It is because price necessary for recoupment of at least variable cost incurs in production.

Exceptions or limitations of law of supply

1. Auction sale: If the firm is badly in need of money or it has to dissolve itself due to any reason immediately it offers its product in large quantity usually at very low price. In this case law of supply doesn’t hold.

2. Stock clearance: If the firm has to clear the stock due to any cause like perishable nature of good, high cost of storage, seasonal and climatic change, unfavorable change in taste of consumer etc, the firm supplies large quantities even at lowered prices

3. Expected future price: If the firm expects rise in prices in near future, the firm supplies less. Even if there is rise in price, the firm waits for further rise in price. If it expects fall in price in near future, it supplies more even if the price is decreasing lately.

4. International and domestic inflation: If there is rise in prices of all or most of the goods, within or outside the county supply doesn’t increase even if price rises.

5. Expected future availability: If the firm estimates the scarcity of commodities substituting its product, it supplies less now in order to make more gain selling in the near future at high price even if there is rise in price