Law of Supply: What are its assumptions?

Supply of a commodity is the function of a price. The law of supply depicts this functional relationship between price of a Commodity and its supply. Unlike law of demand, the quantity supplied generally varies directly with price. The law of supply states that other things being equal; more of a commodity is supplied at a higher price, and less at a lower price. Thus the quantity supplied of a commodity falls with a fall in price and rises with a rise in price. The relation between price and quantity supplied is direct and positive. The supply schedule and supply curve reflect the law of supply.

Individual sellers sell different amounts of a good at different price this is shown in the individual supply schedule. The individual supply schedule of a commodity means how price of a commodity which the sellers are willing and able to make available in the market.

The market supply schedule is the summation of different Individual demand schedules. By adding up different quantities of a commodity at different prices, we get the market supply schedule. The supply schedule showing various prices and quantities of white is given below.

It is observed that the producer seller sells less at low price. At Rs.12 the supply of wheat is 20. With rising prices viz 13, 14, 15 the quantity of wheat rises from 30 to 40 kilograms. At the maximum price 16 he is prepared to sell 60 kg of wheat. Thus as price rises supply extends and as price falls, supply contracts. On the basis of supply schedule a supply curve can be drawn.

In the above diagram, quantity supplied is measured along OX-axis and price along OY-axis. The S.S. supply curve slopes upward. It shows the positive relation between price and quantity supplied. The upward sloping of supply curve SS shows that at lower price quantity supplied is less and at high price quantity supplied is more. In case of extension and contraction of supply the change in supply takes place in the same supply function or the existing supply curve. But in case of decrease and increase in supply the supply curve shifts upward to the left and shifts downward to the right of the existing supply curve.

Assumptions of the law

(1) Natural Factors:

The supply of a commodity depends on the natural environment. The supply of agricultural product is affected adversely by weather, natural calamities like flood, cyclone etc. On the other hand adequate rainfall and good weather etc. increase supply.

(2) Method of Production:

Method of production affects the supply of a commodity by reducing the cost of production. Due to modern method of production cost of production diminishes and the price of the commodity almost remains constant. As a result profit margin rises. Being lured by the windfall profit producers produce more and offer more for sale.

(3) Fall in the Factor Prices:

Supply of a commodity also increases due to the fall in the price of factors of production meant for its production. The prices of factors of production constitute a part of the total cost of production. Due to the fall in the factor cost production cost is reduced with reduced costs the supply of goods rises.

(4) Prices of other goods:

There are certain commodities which are in nature of substitutes and complementary. In case of a substitute the producer will substitute the commodity whose price has fallen. The resources will be diverted from the supply of substitute commodity whose price has fallen.

(5) Number of firms:

If the number of firms producing commodity increases, the market supply curve shifts downward. In the short run the existing firms reap abnormal profit. But lured by the abnormal profit the competitive firms enter the market to produce the same commodity. This raises the supply; likewise the competitive firms leave the market due to loss. So the supply diminishes.

(6) Expectation of future price:

The supply of a commodity depends on the future expectation of price. If the price in expected to fall, the sellers will supply more at a low price and if the price is expected to rise in future, the seller will sell less and store for future sale.