Law of Supply

Introduction

In economics, it is important to note the relationship between price and supply. Economists want to see whether there is a direct relationship between the items sold in the market and their prices. The law of supply is a law that establishes a relationship between price and supply when all other factors are kept constant.

The law of supply is an important law in microeconomics. It not only offers the relationship between price and supply but also helps in gauging the demand in the market at a given price point. As markets want to learn about the supply required to determine prices, the law of supply acts as a benchmark for their initiatives.

What is the Law of Supply?

The law of supply states that when all other factors are kept constant, the relationship between price and supply is proportional. Therefore, the law of supply is a law that determines the relation between supply and price. It says that if there is a price rise of goods in the market, the producers will supply more of the goods to earn more profits. In other words, when the price paid by consumers for an item goes up in the market, the suppliers increase the supply of that item in the market.

The law of supply depicts the behavior of the producers or suppliers in relation to the price of the item produced and sold in the market. When there is a price rise in the market of any item, the suppliers tend to earn more profit by increasing the supply of that item.

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The graph for the law of supply is an upward-sloping straight line where the points of intersection of price and quantity are connected to get the straight line. In the case of each point of price on the y-axis, we get a point on the x-axis that is proportional to the y-axis point. Joining the intersecting points of (x, y) gives a straight line that is upwardsloping.

It is notable that at any given point in time, the supply brought to the market by sellers is fixed. The sellers have to make the decision of whether to withhold or sell the stock of items at hand. The price of the item is determined by consumer demand and sellers can only charge the amount that the market will bear. This means that although suppliers increase the supply at the point of sale, the prices of items are governed by market forces applicable to the item being sold.

When consumer demand for an item goes up in the market, the suppliers can bring new resources to produce more of the item. If there is no increment in the production by already existing suppliers, then new suppliers may enter the market. The prices are set by competitive demand while the supplier-response to the price they can receive sets the total quantity of items supplied.

Examples of the Law of Supply

The law of supply is very common in our day-to-day lives.

Here are a few examples of the law in action.

• Let’s suppose that a toy manufacturer sells 1 million toys for Rs 200 each. When the price of toys is increased to Rs 300, the supply of toys will reach 1.5 million.

• Let’s suppose that the price of air tickets from Bangalore to Mumbai costs Rs 10,000 the number of travelers for which is 1,000. Now, if the price of tickets increases to 15,000, the supply of tickets will reach 1,500.

• When the graduates of various streams in education learn that doing an MBA after graduation increases their chances of getting more salaries, the number of students opting for an MBA will increase.

• If the prices of burgers increase more in relation to pizzas in the market, the bakers will start to sell more burgers than pizzas to earn more revenue.

• As the salaries of lecturers increase with every pay commission report, the number of applicants for lecturers increases automatically.

Determinants of Supply

The determinant of supply are factors that can change or affect the supply of goods in a market. There are various factors that cause a change in the supply and they state the nature, state, and trend of supply over time. They act as milestones of what the suppliers make available in the market at a given price and quantity.

List of Determinants of Supply

Below is a list of the major factors which can affect the supply of products −

• Price

• Improvements in technology and automation

• Expectations of the suppliers

• Tax rates and subsidies

• The number of sellers in the market

• The price of resources used to produce the product

• The price of related products

• The price of joint products made in the same process.

Example of a Determinant of Supply

Let’s assume that an automobile manufacturer assembles the parts and produces automobiles. When all other factors are kept constant, the production of automobiles or the total supply of automobiles will remain constant over time.

However, when the process of assembling is automated, production will increase, and subsequently, the supply of automobiles will also increase.

Notes about determinants of supply

• Supply refers to the quantity of a commodity a seller wants to sell over a given period at some price level. Therefore, supply is related to quantity and price.

• Determinants of supply are factors that affect the supply of goods and services.

• technology, expectations of suppliers, the number of suppliers, increase in tax, feedback from consumers, high wage rate, etc., are some of the determinants of supply.

• The price change of other goods that a producer can produce may lead to a change in supply for the product.

Conclusion

The law of supply also tells the supply of which products should be increased. When the prices of products go up it is indicated by the law of supply that the supply of such products must be increased. The law of supply acts as an indicator of supply thereby also indicating the apparent demand in a market.

The law of supply takes care of the supply side of an economy in relation to the price of a product. The relationship helps in illustrating the effect of increment of price of a product in the market. As the price of products that are high in demand increases, this law indicates that the supply of those products must increase whose demand is high. In other words, the law also helps to identify products that have a high demand in the market.

FAQs

Qns 1. Can the producers increase the prices of goods depending on the law of supply?

Ans. No. The prices of products are determined by market forces. The producers can only increase the supply when the prices of products go up. Thge law of supply indicates the price rise and required increase in supply. It cannot be used to increase the prices of products if the supply of goods goes up.

Qns 2. Why is the supply price graph in the case of the law of supply upward sloping?

Ans. The supply curve in the supply price graph is upward-sloping because, over time, suppliers can decide how much of the goods to produce. They can also decide how much of these goods are brought to the market later on.

Qns 3. How does technology influence supply?

Ans. Technology has impacted the production of goods in an overwhelming manner. The use of technology can lead to a dramatic increase in the increase of production per hour, thereby increasing the supply dramatically too.