State the law of supply. What are its exception? Explain.
State the law of supply. What are its exception? Explain.
Or
What is meant by supply? What are the factors that affects the supply of a product?.
Ans.
Meaning of Supply
By supply is meant the quantities of a commodity or service which a seller is willing and able to offer for sale at various prices during a given period of time. Thus supply is always at a price and in relation to a period of time. The higher the price, the greater will be the quantity of a commodity that will be supplied by a producer, and vice versa. Therefore, the relation between price and quantity supplied is direct and positive.
Factors Influencing Supply
The quantity supplied of a commodity is not dependent upon its price alone but on a number of factors such as the prices of other commodities, the price of factors used in its production, the goals of producers and the state of technology.
These factors can be written in the form of an equation known as the supply function thus:
SQ=f(pQ; pa pb,……….; F1 F2,…..; G:T)
Where S is the supply of commodity Q which is a function f of the price of commodity PQ; of prices of other commodities Pa, Pb, etc., of prices of factors of production F1,F2, etc.; of the goals of producers G; and of the state of technology T.
We discuss these determinants of supply below:
1. Price of the Commodity: The higher the price of a commodity, the larger will be the quantity supplied, and vice versa.
2. Prices of other Commodities: A change in the price of another commodity also affects the supply of a commodity. For instance, if the price of good A rises, the producer of good B may produce less of good B and switch over to the production of good A in order to sell more of it.
3. Prices of Factors: If the price of any one factor of production (i.e. labour or capital) used in the production of a commodity increases, its cost of production will increase. As a result, its output will fall and the supply will be reduced. The reverse will happen in the case of a fall in the price of a factor.
4. Goals of Producers: If a producer aims at maximising profit, he will produce less of the commodity which involves large risk. A producer who aims at maximising his sales will produce and sell more.
5. State of Technology: If new and improved methods of production are used, they tend to increase the supply of commodities.
The Law of Supply
The law of supply states that, other things being equal, the quantity supplied varies directly with the price of the commodity. When price rises, the quantity supplied rises, and when price falls, the quantity supplied also falls. ‘Other things being equal’ refer to the factors that influence the market supply of a commodity, such as the prices of other commodities, the prices of factors of production, the state of technology and the goals of producers. All these factors are assumed to be constant. These are the assumptions of the law of supply.
The law of supply is explained with the help of a schedule and a curve. A supply schedule is a statement of the various quantities of a given commodity offered for sale at various prices per unit of time.
Exceptions:
There are, however, certain exceptions to the law of supply.
(1) When prices are expected to fall much, sellers will sell more in order to clear their stocks. This is so in the short-run.
(2) Over the long-run, the supply is influenced by changes in costs which are, in turn, affected by changes in technology.
(3) Changes in habits, tastes, fashions, weather, and national and international disturbances also affect the supplies of commodities.
Lastly, the rise in the price of a good or service sometimes leads to a fall in its supply. This happens particularly in the case of labour-service. When wages rise to a level where the workers feel satisfied, they will work less than before in order to have more leisure. They will also have a tendency to educate their children rather than send them to work.
