The Assumption, Reasons and Exceptions to Law of Supply Economics

The seller may not be willing to raise the supply even if the prices are going high, hence it is an exception to the law of supply. Supply and Demand Determine the Price of Goods and Quantities Produced and Consumed. Supply and demand have an important relationship because together they determine the prices and quantities of most goods and services available in a given market. In 1890, Alfred Marshall’s Principles of Economics developed a supply-and-demand curve that is still used to demonstrate the point at which the market is in equilibrium. The prices of some goods can increase without reducing demand, which means their prices are inelastic. In short law of supply is a positive relationship between quantity supplied and price.

In case of a substitute the producer will substitute the commodity whose price has fallen. The resources will be diverted from the supply of substitute commodity whose price has fallen. V. Assumes that the transportation cost remain the same. In case the transportation cost reduces, then the supply would increase, which is invalid according to the law of supply. In this diagram SS’ shows the relationship of supply with price. Backward slopping supply curve BS ‘ part represents supply curve is bending at B.

All these assumptions come under the phrase “other things remaining the same“. The total number of firms or sellers remain the same. It is also assumed that there is no change in climatic situation. For example, at any place flood or earth quake occurred. The supply of goods decreases at that place at previously prevailing price.

assumption of law of supply

With the improvement in technique if the cost of production is reduced, the seller would supply more even at falling prices. The law of supply states that quantity supplied increases with increase in price and vice-versa. But this law doesn’t hold true in case of auction sale. An auction sale takes place at that time when the seller is in financial crisis and needs money at any cost. The given schedule shows positive relationship between price and quantity supplied of a commodity.

The law of supply is based on following assumptions. Law is one sided as it explains only the effect of change in price on the supply, and not the effect of change in supply on the price. It can be explained with the help of a backward bending supply curve. The following table and diagram explain the backward bending supply curve of labour. To explain the movement along the supply curve, simply it happens due to any price relative reasons. First is the movement along the supply curve and second is the shift of the supply curve.

Those goods which have very short life-time and they become useless after that are all perishable goods. Those goods must be made available in the market at its right time whatever be its price. So the seller becomes ready to sell his goods at any offered price. When a seller wants to clear its old stock in order to store new goods, he may sell large quantity of goods at heavily discounted price. The law of supply can be explained with the help of supply schedule and supply curve as explained below. There can be exceptions for law of supply when there is prediction of the price will change in the future.

Exceptions to the Law of Supply

Thus the supply of these products can’t be increased after a certain limit in spite of rise in their prices. The law of demand is a fundamental principle of economics that states that at a higher price consumers will demand a lower quantity of a good, and vice-versa. Refers to the fact that law of supply ignores other factors that can influence the supply of a product. These factors can be natural factors, transportation conditions, and government policies.

assumption of law of supply

Further rise in price to Rs.40 and then to Rs.50 per kg results in increase in quantity supplied by the seller to 4kg and then to 5kg. Thus, the above schedule shows that there is positive relationship in between price and quantity supplied of a commodity. Law of supply states that there is a direct relationship between price and quantity supplied of the commodity, keeping other factors constant i.e. ceterus paribus. Monopoly When a small number of producers control the supply of the market then the law of supply may not operate. For example, in the case of monopoly may not necessarily offer a larger quantity supplied even though the price of goods is higher. If there is a tendency of increasing prices at present period, the sellers increase quantity supplied for the lust of profit.

FAQs on Exceptions of Law of Supply

It may be expectations in future to decrease prices. Now they want to maximize their profit due to good present circumstances. If the quantity of natural resources increases, the cost of production decreases. If consumer demand rises over time, the price will rise, and suppliers can choose to devote new resources to production , which increases the quantity supplied. Demand ultimately sets the price in a competitive market; supplier response to the price they can expect to receive sets the quantity supplied. Supply in a market can be depicted as an upward-sloping supply curve that shows how the quantity supplied will respond to various prices over a period of time.

  • If the price in expected to fall, the sellers will supply more at a low price and if the price is expected to rise in future, the seller will sell less and store for future sale.
  • For example, a business will make more video game systems if the price of those systems increases.
  • If the product has PES between 0 and 1, it means percentage change is price brings relatively smaller change of portion in quantity supplied.
  • The individual supply schedule of a commodity means how price of a commodity which the sellers are willing and able to make available in the market.

For example, fidget spinner, when the market’s demand went higher, producers immediately increased their quantity supplied which is bigger than the percentage change is price. Generally, the businesses have to pass through different phases and the sellers have to adapt to such business-related changes. So, in this way, the law of supply is not applicable in this particular case. It is observed in markets that when more price of commodities are offered to sellers. They increase the quantity supplied of these commodities and when the level of prices decreases, the sellers decrease the quantity supplied. The law of supply summarizes the effect price changes have on a producer’s behavior.

There should not be any change in the income of the purchaser or the seller. The commodity must be divisible and available in small units.

The sellers may sell these out of fashion goods even at cheap rates. Following are the causes of positive slope of supply curve. The amount of investment is affected by the change in political situation of a country.

Understanding the Law of Supply

A consumer surplus occurs when the price that consumers pay for a product or service is less than the price they’re willing to pay. When consumers start paying more for cupcakes than for donuts, bakeries will increase their output of cupcakes and reduce their output of donuts in order to increase their profits. When college students learn that computer engineering jobs pay more than English professor jobs, the supply of students with majors in computer engineering will increase. Skylar Clarine is a fact-checker and expert in personal finance with a range of experience including veterinary technology and film studies. She is a financial therapist and is globally-recognized as a leading personal finance and cryptocurrency subject matter expert and educator.

This curve is also known as an “Exceptional Supply Curve” as such a thing happens only in some exceptional cases like—labour supply or savings. Supply of labour after a certain point, when the wage rate rises, its supply will tend to diminish. Why such situation because workers normally prefer leisure to work after receiving a certain amount of wage. By seeing the diagram the conclusion can be drawn that when price rises supply increases and when the price reduces the supply reduces. This law can be explained with the help of a supply schedule as well as by a supply curve based on an imaginary figures and data.

More firms – If number of suppliers increases, the quantity supplied will obviously increase together, vice versa. In this case the supply curve shift to right, initially S1 to S2. The equilibrium price also decreases from the point of intersection of P1 and Q1 to another intersection of P2 and Q2, eventually the equilibrium price had been decreased. Graph above shows the concept of Law of Supply with shape of upward slopping linear graph showing if the price increases quantity supplied will increase together. It does not say anything about the quantity of increase in the supply of the commodity with a certain increase in price. Sometimes sellers are keen to sell perishable or fresh goods even at cheap prices.

Example can be anything that has finite quantity and cannot be produce more such as famous art piece or limited-edition shoes. In this case the supply curve shift to left, initially S1 to S2. The equilibrium price also increases from the point of intersection of P1 and Q1 to another intersection of P2 and Q2, eventually the equilibrium price had been increased. Backward Countries – In economically backward countries, production and supply cannot be increased with increase in prices due to shortage of resources. The situation when there is only one vendor of a service refers to monopoly. The single seller is the price maker and has control over different prices.

Government policy is also important and vital for the law of supply. Government policies like—taxation policy, trade policy etc., should remain constant. There should not be any change in the technique of production.

If the wage paying to computer engineer increases, there will be more students will choose to study computer science. As well as in business, if the profitability of the product increases, the firm will decide to manufacture more goods. The law of diminishing marginal utility is based on the logic that all human wants are manageable. The up-to-date goods that are in trend often have high prices. However, those goods, which are out of fashion, have cheap prices.

Assumptions of Law of Supply

Hence, initially, the labour supply is directly linked to the wages but after a particular point, the relation between the supply of labour and wages terms is inverse. It shows that the supply of labour refers to an exception of the law of supply. When the goods and services are in fashion then the sellers can supply them at reasonable and higher prices. But at times, some goods go out of fashion and are no longer trendy. These goods are being sold at very low prices for clearing their stock. It is challenging to increase the agricultural produce at a certain level as land is a limited resource.

This is because the advanced technique would reduce the cost of production and make the seller supply more at a lower price. In Figure-14, the supply curve is showing a straight line and an upward slope. This implies that the supply of a product increases with increase in the price of a product. Refers to a supply assumption of law of supply schedule that represents the different quantities of a product supplied by an individual seller at different prices. In this connection if the seller expects a rise in the price in future, he may withhold his stock of the commodity. He will therefore reduce his supply in the market at the present price.

If price of a commodity decreases and cost of production also decreases, at the same time, the quantity supplied does not decrease and profit remains constant. An exception to the law of supply arises when there is a reduction in the quantity supplied with increasing prices. Several commodities fall under exceptions like farm produce, economic, perishable commodities, business change, and more.

Law of Supply: Schedule, Curve, Function, Assumptions and Exception

The opposite is true if the price of video game systems decreases. The company might supply 1 million systems if the price is $200 each, but if the price increases to $300, they might supply 1.5 million systems. 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.

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