The Law of supply states that other factors remaining constant, price and quantity supplied of a good are directly related to each other. In other words, when the price paid by buyers for a good rise, then suppliers increase the supply of that good in the market.
The Law of supply depicts the producer’s behavior at the time of changes in the prices of goods and services. When the price of goods rises, the supplier increases the supply in order to earn a profit because of higher prices. This law implies that supply and prices are positively related to each other.
The Supply Schedule
The supply schedule is the tabular presentation of the law of supply. It shows the different prices of a commodity and the corresponding quantity that the seller is willing to sell.
The Supply Curve
The supply curve is the graphical presentation of the supply schedule. It is an upward sloping curve showing a positive relationship between price and quantity supplied.
Figure 1: Supply Schedule and Supply Curve
Why Supply Curve Slopes upward from left to right?
Why does supply expand as price rises?
Let us now try to understand why the supply of a commodity expands as the price rises. Generally, this tendency can be explained in terms of the following three factors: (i) in response to a rise in the price of a commodity, the producers often run down their inventories, thereby increasing their supply of the product; (ii) some producers employ additional quantities of factors of production to increase supply and avail the benefits of higher price; and (iii) a high price attracts some such producers also who will otherwise not be interested in producing the commodity. These producers take advantage of the fact that various factors of production can be used alternatively. Therefore, they attempt to switch over to the production of a high-priced commodity whose supply consequently increases.
Why does supply diminish as price falls?
Let us now explain why the supply of a product diminishes in response to a fall in its price. Generally, the following three factors account for this trend: (i) at a relatively lower price the producers do not release big quantities from their stocks. On the contrary, they build up their inventories with the expectation that the price may rise in the future yielding larger profits; (ii) at lower prices profitability rates are also correspondingly lower. This naturally discourages producers who decide to produce smaller quantities, and (iii) some relatively inefficient producers who do not hope to earn any profit at a low price either stop their production or reduce it. As a result, the supply of the commodity in the market is reduced.
Exceptions to 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, the positive relationship between supply and price may not hold true.
The various exceptions to the law of supply are:
1. Future Expectations
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 more even at a lower price. However, if they expect the price to rise in the future, they would reduce the supply of the commodity, in order to supply the commodity later at a high price.
2. Agricultural Goods
The law of supply does not apply to agricultural goods as their production depends on climatic conditions. If due to unforeseen changes in weather, the production of agricultural products is low, then their supply cannot be increased even at higher prices.
3. Perishable Goods
In the case of perishable goods, like vegetables, fruits, etc., sellers will be ready to sell more even if the prices are falling. It happens because sellers cannot hold such goods for long.
4. Rare Articles
Rare, artistic, and precious articles are also outside the scope of the law of supply. For example, the supply of rare articles like a painting of the Mona Lisa cannot be increased, even if their prices are increased.
5. Backward Countries
In economically backward countries, production and supply cannot be increased with a rise in price due to a shortage of resources.