The Law of Supply: Assumptions, Reasons, and Exceptions

Economists have studied the behavior of sellers and buyers in the market to arrive at the law of supply. The law of supply states the direct relationship between the price of a commodity and the quantity supplied, assuming other factors remain constant. The purpose of this article is to explore the assumptions, reasons, and exceptions to the law of supply.

Assumptions of the Law of Supply

The law of supply is based on the following assumptions:

  • Price of other goods remain constant.
  • There is no change in technology.
  • Prices of production factors remain the same.
  • Taxation policy remains unchanged.
  • The goals of the producer remain the same.

Important Points about the Law of Supply

  • The law of supply states a positive relationship between price and quantity supplied, with other factors remaining constant.
  • The law of supply is a qualitative statement, indicating the direction of change in quantity supplied but not the magnitude of change.
  • It does not establish any proportional relationship between the change in price and the resulting change in quantity supplied.
  • The law is one-sided, as it only explains the effect of change in price on supply and not the effect of change in supply on price.

Reasons for the Law of Supply

The main reasons for the operation of the law of supply are:

  • Profit Motive: The primary goal of producers is to secure maximum profits. With a rise in the price of a commodity, profits increase, and producers increase the supply of the commodity by increasing production. On the other hand, with a fall in price, supply decreases as the profit margin decreases.
  • Change in Number of Firms: A rise in price induces prospective producers to enter the market to earn higher profits. An increase in the number of firms raises the market supply. Conversely, as the price starts falling, some firms that do not expect to earn any profit at a low price either stop production or reduce it, reducing the supply of the commodity.
  • Change in Stock: With an increase in the price of a good, sellers are willing to supply more goods from their stock. However, at a lower price, producers do not release a large quantity from their stock, instead, they increase their inventories with the expectation that the price may rise in the near future.

Exceptions to the Law of Supply

Although the supply curve generally slopes upwards, showing that the quantity supplied rises with a rise in price, there are certain exceptions to the law of supply. These exceptions include:

  • Future Expectations: If sellers expect a fall in price in the future, the law of supply may not hold true. In this situation, sellers will be willing to sell more even at a lower price. Conversely, if they expect the price to rise in the future, they would reduce the supply of the commodity to sell it later at a high price.
  • 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, production of agricultural products is low, their supply cannot be increased even at higher prices.
  • Perishable Goods: In the case of perishable goods, such as vegetables and fruits, sellers will be willing to sell more even if the prices are falling. It is because they cannot hold such goods for long.
  • 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 the painting of Mona Lisa cannot be increased, even if their prices increase.
  • Backward Countries: In economically backward countries, production and supply cannot be increased with a rise in price due to a shortage.

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