Law of Supply
Last Updated on February 5, 2020 by Naeem Javid Muhammad Hassani
Contents
Law of Supply
Definition of Law of Supply
Explanation of Law of Supply
Supply Function
Px
|
4
|
3
|
2
|
1
|
QxS
|
100
|
80
|
60
|
40
|
Law of Supply Curve/Diagram
Example of Law of Supply
Assumptions of Law of Supply
Nature of Goods
Government Policies
Alternative Products
Squeeze in Profit
Limitations/Exceptions of Law of Supply
(i) Ability to move stock.
(ii) Legislation restricting quantity.
(iii) External factors that influence your industry.
Importance of Law of Supply
- Supply responds to changes in prices differently for different goods, depending on their elasticity or inelasticity. Goods are elastic when a modest change in price leads to a large change in the quantity supplied. In contrast, goods are inelastic when a change in price leads to relatively no response to the quantity supplied. An example of an elastic good would be soft drinks, whereas an example of an inelastic service would be physicians’ services. Producers will be more likely to want to supply more inelastic goods such as gas because they will most likely profit more off of them.
- Law of supply is an economic principle that states that there is a direct relationship between the price of a good and how much producers are willing to supply.
- As the price of a good increases, suppliers will want to supply more of it. However, as the price of a good decreases, suppliers will not want to supply as much of it. For producers to want to produce a good, the incentive of profit must be greater than the opportunity cost of production, the total cost of producing the good, which includes the resources and value of the other goods that could have been produced instead.
- Entrepreneurs enter business ventures with the intention of making a profit. A profit occurs when the revenues from the goods a producer supplies exceeds the opportunity cost of their production. However, consumers must value the goods at the price offered in order for them to buy them. Therefore, in order for a consumer to be willing to pay a price for a good higher than its cost of production, he or she must value that good more than the other goods that could have been produced instead. So supplier’s profits are dependent on consumer demands and values. However, when suppliers do not earn enough revenue to cover the cost of production of the good, they incur a loss. Losses occur whenever consumers value a good less than the other goods that could have been produced with the same resources.
Determinants of Supply
Technology changes
Resource supplies
The producer also has to pay for other resources such as raw materials and labor. if his money is short on supplying a certain number of products because of an increase in resource supplies, then he has to reduce his supply.
Tax/ Subsidy
A producer aims to maximize his profit, but an increase in tax will only increase his expenses, decreasing his capacity to buy resource supplies and forcing him to reduce his supply.
Price of other goods produced
Ceteris Paribus
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NJMH is working as Deputy Conservator of Forests in Balochistan Forest & Wildlife Department (BFWD). He is the CEO of Tech Urdu (techurdu.net) Forestrypedia (forestrypedia.com), Majestic Pakistan (majesticpakistan.pk), All Pak Notifications (allpaknotifications.com), Essayspedia, etc & their YouTube Channels). He is an Environmentalist, Blogger, YouTuber, Developer & Vlogger.