Law of Supply
- mansigoyal | Wed Apr 14 2021
In layman terms, supply means making anything available to someone. Ask any economics person, he will never think of this. In economics, Supply is the amount of a resource that firms,producers, labourers, providers of financial assets, or other economic agents are willing and able to provide to the marketplace or directly to another agent in the marketplace. The relationship between the two variables i.e. Quantity and price is depicted through a positively sloped curve called Supply curve.
Supply is usually considered in goods market, labour market and financial market. In the goods market, supply is the amount of a product that producers are willing to sell at various given prices when all other factors are held constant. In the labor market, the supply of labor is the amount of time per week, month, or year that individuals are willing to spend working, in exchange of a wage rate. In financial markets, the money supply is the amount of highly liquid assets available in the money market, which is either determined or influenced by a country's monetary authority.
There are innumerous factors that influence the supply of a product. Law of supply states that there is a direct relation between the quantity supplied and price offered which explicitly means, with an increase in price of Good X, the quantity supplied of Good X also rises and vice versa. This gives rise to a positively sloped curve. A very important point to take note of is that Law of Supply assumes all the other factors as ceteris paribus.
Lets have a look at other determinants of supply. Suppose, you are a prodcuer of smartphones. You have discovered some technological advancements which will help you to produce effectively. Given that prices of smartphones remains constant, you will prefer to produce more smartphones because you are a rational producer. Government intervention seriously affects the production of any commodity due to environmental and health regulations, hour and wage laws, taxes,electrical and natural gas rates and zoning and land use regulations.
Seasons affect the supply of a product. For instance, supply for jackets rises in winter season.Number of sellers of a place is one more factor. A rise in number of sellers will lead to increase in supply of a product at the same price. Expectations of a producer is one more. Suppose you are expecting a hike in prices for face masks, you will start producing more to sell in the future.
The change in quantity due to change in price is termed as change in quantity supplied. The change in quantity due to change in other determinants is known as change in supply of a product. Former leads to movement along the supply curve whereas, the later leads to shifting of the supply curve.
Agricultural products can be cited as an exception because due to paucity of resources (land),production cannot be increased beyond a certain level. Monopoly is another exception. The producer has full control over the price because he is the sole producer. Thus, he is the price maker and has full control over the price.