Introduction to Supply and Demand

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Introduction to Supply and Demand

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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.

  • Market supply curve also represents the direct relationship between the quantity supplied and price of a product.
  • On the other hand, when prices fall, producers tend to decrease production due to the reduced economic opportunity for profit.
  • In the figure above OX axis shows quantity of demand and OY axis shows price.
  • Maximising profits is the primary goal of producers when they supply a good or service.

In such a case, sellers would not supply the whole quantity of the product and would wait for the increase in price in future to earn high profits. In the given figure, price and quantity supplied are measured along the Y-axis and the X-axis respectively. By plotting various combinations of price and quantity supplied we derived points A, B, C, D, E curve and joining these points we find an upward sloping i.e. The positive slope of the supply curve SS1 establishes the law of supply and shows the positive relationship in between price and quantity supplied.

The Assumption, Reasons and Exceptions to Law of Supply Economics

This law explains the direct relationship between price and quantity supplied of a commodity. More quantity of a commodity is supplied due to the following reasons. The market supply schedule is the summation of different Individual demand schedules.

  • The law of supply states that a higher price for a good or service will lead producers to supply more of that good or service to the market.
  • Supply curve can be of two types, individual supply curve and market supply curve.
  • In this diagram SS’ shows the relationship of supply with price.
  • If television prices are $1,000, manufacturers will focus on producing television sets over ventures and provide incentives to build more TVs.
  • The behavior to seek maximum profits forces the supply curve to be upward-sloping.

Therefore, by increasing production, manufacturers increase the commodity’s supply. On the other hand, as price fall, supply also declines since low price result in lower profit margins. The law of supply states that a price increase will increase production.

Expectation of change in prices

Thus, the supply curve of a commodity slopes upward from left to right. In the above diagram, quantity supplied is measured along OX-axis and price along OY-axis. 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.

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Whether an individual is a manufacturer or a consumer, the supply and demand equilibrium is relevant in daily market transactions. If there is an increase in tax rates, then the supply of product would decrease even at the higher price. Therefore, for the application of law of supply, it is necessary that government policies should remain constant. The law of supply is one of the most fundamental concepts in economics. It works with the law of demand to explain how market economies allocate resources and determine the prices of goods and services.

If the cost of production increases along with the rise in the price of product, the sellers will not find it worthwhile to produce more and supply more. Therefore, the law of supply will be valid only if the cost of production remains constant. It implies that the factor prices such as wages, interest, rent etc., are also unchanged. The graphical representation of supply schedule is called supply curve.

Affecting factors

They work on building up their inventory in anticipation of potential price increases in the future. In the above graph, the rising slope of the supply curve (SS) indicates a clear relationship between price and quantity supplied. The Law of Supply states that, in general, an increase in price leads to an increase in supply and vice versa. Put simply, as the price of a good or service increases, suppliers are more likely to produce additional units.

State two assumptions of the Law of Supply.

Understanding supply elasticity is essential for making informed economic decisions and analyzing market behavior. It is typically represented using a supply curve on a graph and a supply schedule in a table. The market theory of supply and demand was popularized by Adam Smith in 1776.

This is because if the cost of production rises with increase in price, then sellers would not supply more due to the reduction in their profit margin. Therefore, law of supply would be applicable only when the cost of production remains constant. The law of supply states that, other things remaining the same, the quantity supplied of a commodity is directly or positively related to its price.

According to the law of supply, if the price of a product rises, then the supply of the product also rises and vice versa. However, there are certain conditions where the law of supply is not applicable. In such cases, the supply of a product falls with the increase in price of a product at a particular point of time. Refers to a supply schedule that represents the different quantities of a product that all the suppliers in the market are willing to supply at different prices. Market supply schedule can be drawn by aggregating the individual supply schedules of all individual suppliers in the market. For example, in case the price of a product increases, sellers would prefer to increase the production of the product to earn high profits, which would automatically lead to increase in supply.

The supply curve is upward sloping because, over time, suppliers can choose how much of their goods to produce and later bring to market. 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. Being lured by the windfall profit producers produce more and offer more for sale. Supply elasticity is a crucial concept in economics that quantifies how responsive producers are to changes in price. It depends on factors such as time horizon, production capacity, availability of inputs, and market structure.

In case of perishable goods, like vegetables, fruits, etc., sellers will be ready to sell more even if the prices are falling. The Law of Supply is a cornerstone of economic analysis, providing valuable insights into how producers respond to changes in prices and market conditions. The exception to the law of supply is represented on the regressive supply curve or backward sloping curve. Similarly, if the price of the product decreases, the supplier would decrease the supply of the product in the market as he/ she would wait for a rise in the price of the product in the future. The law of supply can be explained through a supply schedule and a supply curve. A proper balance must be achieved where both parties engage in ongoing business transactions to benefit consumers and producers.

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