The law of supply is known as a basic principle in economics, it assumes all else will be constant, an increase in the price of goods will have a corresponding direct increase in the supply thereof. The law works similarly for decreases in prices. There’s two key facts you should know about the law of supply.
- The law of supply states that a higher price leads to a higher quantity supplied and that a lower price leads to a lower quantity supplied.
- Supply curves and supply schedules are tools you can use to summarize the relationship between supply and price.
Now, the law of supply depicts the producer’s behavior that when the price of a good rises, the tendency is to increase supply because there is now more profit to be earned. On the other hand, when prices fall, the producer will decrease production due to a reduced economic opportunity.
Law Of Supply Formula
QxS = QxS = R (Px)
- QxS – Quantity supplied of commodity x by the producers
- R – Function of
- Px – Price of commodity x
What are the limitations and factors affecting the Law of Supply?
The overarching relationship is between price and quantity, and applies only if all other factors remain constant. There are other factors that can affect the price of a given item, and thus the quantity supplied. These are some of the more common factors:
- Cost of Production – When changes take place on the cost of raw materials and labor to produce a unit of supply, the volume will change too, this assuming that the selling price will remain the same. The variable cost affecting profit margins plays a key role in targeting the quantity to produce.
- Technological Changes – Advancement in technology can boost the efficiency by which units are produced, which can reduce the cost of production. This would have a similar effect as outlined under “Cost of Production.”
- Taxes – Imposition of taxes in the production of goods limits the profitability of a commodity. Similarly, if a producer is required to remit a portion of sales as tax, a producer will be less inclined to up supply.
- Legislations – Some regulatory laws may be put in place that limits the quantity of a specific product. Take the energy industry as an example, carbon offsets limit the amount certain companies can supply, so they’re limited by that law.
- Periods of Uncertainty – In situations that have higher risk, producers may be more open to lower supplies so they can offload their inventory. During war and civil unrest, producers are more than eager to sell at a lower price.
Difference Between Supply And Quantity Supplied
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