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Meaning of Supply
Supply refers to the quantity of goods and services that producers or sellers are willing to sell at a particular time and price.
Just as demand requires both the willingness and ability to pay the price, supply also requires both the willingness and ability to sell the goods.
If a producer has the ability to sell a good but is not willing to do so, it cannot be considered supply.
Similarly, if a producer is willing to sell but lacks the ability to do so, it also cannot be considered supply. Therefore, supply is created only when there is a combination of both the ability and willingness to sell a good.
Thus, supply is defined as the quantity of any good that a seller or producer is prepared to sell at a specific time and price.
Supply is influenced by factors other than price. Therefore, here, factors other than price are assumed to be constant. In this situation, supply is a function of price, meaning that supply increases when the price increases because higher prices lead to higher profits.
Conversely, the quantity supplied decreases when the price decreases because lower prices lead to lower profits. Therefore, there is a positive relationship between price and quantity supplied.
Law of Supply
Producers, suppliers, or sellers supply goods or services in the market. When the price of goods or services in the market increases, they are willing to supply a larger quantity of goods or services, and when the price is low, they are willing to supply a smaller quantity.
The law of supply states that, other things remaining equal, there is a direct or positive relationship between the price of a good and the quantity supplied.
That is, other things remaining equal, if the price of a good increases, the quantity supplied also increases, and if the price decreases, the supply also decreases.
The law of supply is based on the following assumptions:
(a) The state of production technology remains constant.
(b) There is no change in the cost of production or the prices of the resources used in production.
(c) Weather and climate conditions do not change.
(d) There is no change in government policy.
(e) The producer's expectations regarding the future price of the good do not change.
(f) The prices of other goods do not change.
(g) There is no change in the producer's objectives.
Based on the assumptions mentioned above, the law of supply can be explained with the help of the supply schedule (supply list) given below:
Supply Schedule (Supply Table)
| Price of Goods (Rs. per unit) | Supply of Goods (Units per week) |
|---|---|
| 20 | 1 |
| 40 | 2 |
| 60 | 3 |
| 80 | 4 |
| 100 | 5 |
The above supply schedule shows the quantity of a particular good supplied at different prices in a week. Initially, when the price of the good is Rs. 20 per unit, the supply of that good is 1 unit per week.
When the price of the good increases from Rs. 40 per unit to Rs. 60, Rs. 80, and Rs. 100 per unit, the supply of the good also increases from 1 unit to 2 units, 3 units, 4 units, and 5 units per week, respectively.
The table shows that as the price of the good increases, the quantity supplied of that good also increases. The table demonstrates the law of supply.
The law of supply is explained below with the help of a graph or supply curve:
Graph Showing the Law of Supply
As the price of the good increases from Rs. 20 per unit to Rs. 40, Rs. 60, Rs. 80, and Rs. 100 per unit, the supply of the good also increases from 1 unit to 2 units, 3 units, 4 units, and 5 units, respectively. This is shown by the supply curve SS. Here, as the price of the good increases, the quantity supplied also increases.
Therefore, the supply curve, which slopes upwards from the bottom left to the top right or has a positive slope, shows the direct relationship between the price of the good and the quantity supplied, or the law of supply.
Limitations or Exceptions of the Law of Supply
In the process of explaining the law of supply, the phrase "other things remaining equal" is used. This phrase itself expresses the limitations of the law of supply.
The situations where the law of supply does not apply are the limitations or exceptions of this law. Some limitations or exceptions of the law of supply are as follows:
(a) Producer's Expectations Regarding the Future Price of the Good: If a producer anticipates a significant fall in the price of the good in the future, the law of supply does not apply. In this situation, they are willing to supply or sell a larger quantity of the good even at the current or declining price because if the price falls further, they will incur even greater losses.
Similarly, if a producer expects the price of the good to increase significantly in the future, they will reduce the supply of the good even at the current or slightly increased price in order to increase the supply or sales of the good when the price has increased.
(b) If the Producer Faces an Economic Crisis or Needs More Money Immediately: If a producer or seller urgently needs more money, they will sell their goods even when the price is low to meet their monetary needs. In this situation, the law of supply does not apply.
(c) In the Context of Rare Goods: The law of supply does not apply in the context of rare and artistic goods because the supply of such goods cannot be increased even if the price increases.
(d) In the Context of Perishable Goods: Producers have to sell more perishable goods such as vegetables, fruits, etc., which spoil quickly and cannot be stored for long, even at a current or low price. Therefore, the law of supply does not apply in the context of perishable goods.
In addition to the limitations or exceptions mentioned above, producers also sell larger quantities of goods that are nearing their expiration date, are becoming obsolete, or are in old stock, even at lower prices, meaning the law of supply does not apply.
Similarly, the law of supply does not apply if there are changes in weather and climate conditions, changes in government policy, and changes in the prices of other goods.
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