Useful Notes on the “Law of Supply”

The law of supply shows a direct relationship between price and supply of a commodity. The law states that as the price of commodity increases, the quantity of the commodity supplied per unit of time increases and vice-versa, assuming all other factors influencing supply remain unchanged. In this statement, change in price is the cause and change in supply is the effect. Thus, price rise leads to supply rise and not otherwise.

The relationship between price and supply can be shown by drawing the supply curve. The supply curve for a product depicts the direct relation between the price of that commodity and the quantity, producers wish to supply at that price.

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This curve can be drawn by preparing supply schedule, which is a tabular statement that gives different prices of a commodity and the quantities which a producer is willing to supply per unit of time, at each price, assuming other factors affecting the supply to be constant. A hypothetical supply schedule is given in the following table.

Supply curve based on this imaginary data is shown below (Fig. 3.1)

This curve is drawn on the assumption that all other factors (other than the price of the commodity) that affect the supply remain same. Supply curve conveys the same information as a supply schedule.

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The higher the price, the greater is the inducement to the producer to produce more and vice-versa. The upward sloping supply curve is a diagrammatic representa­tion of the law of supply. However, the supply curve for labour is backward bending beyond a certain wage rate.

Like the demand curve, the supply curve also indicates the planned or expected behaviour of the sellers. It shows the maximum quantity produced and supplied at any given price or the minimum price expected by each seller for a given quantity of a commodity.

In the market, a commodity is supplied by many producers. Market (or industry) supply at a particular price of the commodity is obtained by adding the amounts supplied by the individual producers at that price.

A market supply schedule for a commodity is the sum of individual supply schedules of all the producers engaged in the production of a commodity during a given time. It reflects the total of various quantities offered for sale by all the producers at different prices.

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Suppose, there are only two producers, Anu and Manu, producing a commodity. Individual supply schedules and the resultant market supply schedule are given below:

Market supply curve is the horizontal summation of individual supply curves. Alternatively, we can get market supply curve by plotting the various price quantity combinations (shown in the market supply schedule) on a diagram. Fig. 3.2 depicts the market supply curve based on the market supply schedule prepared in Table 3.2.