The Assumption, Reasons and Exceptions to Law of Supply Economics

The supply curve shows how the production volume of a good or service changes with its price. As the price of a good goes up, so does its supply, and vice versa. If the underlying cost of manufacturing a good or service changed, for example, the entire price-quantity relationship would change, too. Also called a market-clearing price, the equilibrium price is that at which demand matches supply, producing a market equilibrium that’s acceptable to buyers and sellers. As with demand, supply constraints may limit the price elasticity of supply for a product. Supply shocks can cause a disproportionate price change for an essential commodity.

A rise in price induces the prospective producers to enter into the market to produce the given commodity so as to earn higher profits. However, as the price starts falling, some firms which do not expect to earn any profits at a low price either stop the production or reduce it. It reduces the supply of the given commodity as the number of firms in the market decreases. It assumed that there is no change in cost of production because of the profit decreases with the increase in cost of production and it causes the decrease in supply. If price of a commodity decreases and cost of production also decreases, at the same time, the quantity supplied does not decrease and profit remains constant.

As the number of businesses in the market declines, it decreases the supply of the given commodity. The supply curve is typically upward sloping, meaning that as the price of a product increases, the quantity supplied also increases. This reflects the basic economic principle of supply and demand, where producers are incentivized to supply more of a product at a higher price. The law of supply or supply hypothesis gives us the relationship between price and quantity supply of the commodity. It states that other things remaining the same, the quantity of any commodity that a firm will produce and offer for sale rises with a rise in its price and falls with a fall in its price.

Reasons behind Direct Relationship between Price and Supply

This is known as a backward bending supply curve and is a rare occurrence in the real world. If the business firm needs a large amount of liquidity or cash, it may sell a large amount of the product lowering the price. In the case of the price of the product is decreasing and if the seller feels that the price will further decrease in the future then he or she may increase the supply even at decreasing price. This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security.

1. Producers play a critical role in the Law of Supply as they determine the quantity of goods they are willing and able to supply at various price levels.
2. It reduces the supply of the given commodity as the number of firms in the market decreases.
3. The cost of production increases due to increase in prices of capital goods.
4. It incorporates both the law of supply and the law of demand.
5. Supply will tend to decline toward zero at product prices below production costs in industries where suppliers aren’t willing to lose money.
6. The degree to which price changes affect the product’s demand or supply is known as its price elasticity.

No change in technology

For some products, such as in agriculture, the quantity supplied is dependent on the weather. Higher prices give suppliers an incentive to supply more of the product or commodity, assuming their costs aren’t increasing as much. The law of supply is one of the most fundamental concepts in economics.

Exceptions to the Law of Supply

The law of supply states that a company will react to higher market prices of a good by increasing its production. A company looking to maximize profit will use its lowest-cost options first. When it produces more goods, it will need to pay more in production costs (assuming other factors are equal). To justify the increase in production, the company must raise the price.

When the price of a commodity increases, the seller increases the quantity supplied. The profit of seller increases and the aim of seller is to profit maximization. The quantity supplied is expressed on X-axis while price is measured on Y-axis.

What is the difference between a change in supply and a change in the quantity supplied?

1. The law of supply and demand reflects two central economic principles that describe the relationship between price, supply, and demand.
2. The interactions between supply, demand, and price in a free marketplace have been observed for thousands of years.
3. When it produces more goods, it will need to pay more in production costs (assuming other factors are equal).
4. The law of supply to operate these other factors except its price should hold constant or unchanged.
5. In the case of the auction sale, the law of supply is not applicable.

For example, when college students learn that computer engineering jobs pay more than English professor jobs, the supply of students with majors in computer engineering increases. If consumers start paying more for cupcakes than for doughnuts, bakeries will increase their output of cupcakes and reduce their output of doughnuts to increase their profits. British economist Alfred Marshall (1842–1924), a specialist in microeconomics, contributed significantly to supply theory, especially in his pioneering use of the supply curve. He emphasized that the price and output of a good are determined by both supply and demand; the two curves are like scissor blades that intersect at equilibrium. It is the situation in the economy in which all the economic activities like production, employment, consumption, investment, etc. decrease sharply. So, the suppliers supply more even at a low price due to fear of further fall in the price due to the worse condition in the economy.

Technological advancements play a crucial role in shaping supply curves. The increase in the price of the commodity motivates not only the existing producers but also many new prospective or potential producers in the market. For example, the rise in the price of onion will motivate the farmers to produce more quantity of onion in assumptions of law of supply place of potato and other vegetables. The farmer would withdraw the resources from the production of potato and devote the same to the production of onion.

This relationship is crucial for understanding how producers respond to changes in the market. For example, if the price of a product increases, producers will be incentivized to supply more of it, leading to a movement along the supply curve. A supply curve shows the quantity of a product that producers are willing and able to supply at different prices. It is a visual representation of the law of supply and provides valuable information about the behavior of producers in a market.

First, you take how much you spend to make one pitcher of lemonade — The cost of lemons, water, sugar, cups, and ice. Then you take the number of cups you can sell out of each pitcher of lemonade. You divide the cost of goods sold by the number of cups, and you get the cost per cup. In order to make a profit, you want to sell each cup at a price that is higher than what it cost you to make it. The law of supply describes the relationship between the price of a product and the willingness of a business to make it — The higher the price, the higher the production volume, and vice versa.