Law of Supply
The Law of Supply is a term used in Microeconomics which states that all other factors being equal, as the price of a product or service increases, the quantity supplied for it also increases, and vice versa.
Another way to explain it is that when price increases, more number of suppliers start selling or the same supplier increases production and starts selling more to garner greater profits, thus increasing supply.
What is Supply?
Supply, as used in Economics, describes not just the seller’s intent of sell a product or service at a certain price, but also his ability to sell it at that price.
Factors Assumed Constant
In the definition of Law of Supply, the factors that are considered unchanged are generally the price of other goods and the disposable income of the individual, among others. Change in prices of competitor goods may cause a change in the price of a product.
Similarly, a change in the disposable income of an individual may also have an impact on the supply of a particular product. There are other factors like population size, an expectation of future change in prices, and tastes and preferences of the customers which are also assumed constant.
The Supply Curve
The Supply Curve is a graphical representation of the Law of Supply. The Y-Axis denotes the Price and the X-Axis denotes the Quantity Supplied.
It slopes upward because the Price and the Quantity Supplied have a directly proportional relationship – that is, if the Price increases, the Quantity Supplied also increases, and vice versa. From the diagram, it can be noted that Q1 is the Quantity Supplied at a Price P1:
- As Price reduces from P1 to P2, the Quantity Supplied also reduces from Q1 to Q2
- As Price increases back from P2 to P1, the Quantity Supplied increases from Q2 back to Q1
Change in Supply
Supply may be impacted by some other factors which are held constant in the Law of Supply such as change in the price of competitor products and change in income of the individual. Since these factors are not plotted on the graph of the Supply Curve, any change in them may cause a shift in the supply curve.
A Change in Supply is different from a change in Quantity Supplied. A change in Quantity Supplied is a movement along the curve as Price or Quantity Supplied increases or decreases. A change in Supply, on the other hand, is depicted by an entire shift in the supply curve.
Exceptions to the Law of Supply
There are some cases where the Law of Supply is not applicable, some of which are:
- Basic or necessary goods like medicines or staple food like rice and potato may not be impacted much by the changes in price to a large extent
- Emergency Situations like famine, war, etc. are times during which the natural operation of the Law of Supply gets suspended and consumers’ buying behavior becomes abnormal. In such a scenario, the supply follows its own rules, irrespective of the price.
- Expectation of future changes in prices may induce the suppliers to sell even larger quantities of a product whose prices have reduced, in expectation that it may further reduce tomorrow.