Monday, 28 December 2015

The law of supply definition | supply schedule | supply curve

As we have seen earlier, a supplier always tries to sell more and more commodities when the prices are high and reversely, restricts his supplies when prices start falling. This is the underlying fact of supply.

The law of supply employs this basic reality in its definition. It assumes that while other factors determining supply are constant, changes in price will result in changes of quantities supplied.

Law of Supply
The law of supply states that "all other factors remaining constant, an increase in price will result in an increase in quantity supplied and vice versa". In other words, the law of supply states that there is a direct relationship between price and quantity.

What is supply schedule
Supply schedule is a table or chart depicting the changes in quantities supplied at different prices of a commodity based on the above law of supply.

Suppose a supplier deals in the rice business. At a price of say Rs.50 per kg., the supplier will be putting into market all of his stock say 10,000 kg. of rice. If the price comes down to Rs.45 per kg., he will be supplying only say 8,000 kg. If the price further goes down to Rs.40, he will restrict more supplies and will be supplying only 5,000 kg. On the other hand, suppose price increases from Rs.50 to Rs.60 per kg., then he will try to procure more stocks from other sources and increase his supplies to 15,000 kg or like that. 

The same thing can be presented in the shape of a chart as shown below.

Supply Schedule chart

Price of Rice (Rs. Per kg)
Quantity of rice supplied (in Kg)

So, it is clear from the above supply schedule that the supplier decreases his supply quantity when prices fall. If you view the chart from bottom to top, you will realise that the supplier has increased his supplies whenever the price increased from previous price. The same thing can be illustrated through a supply curve also.

Supply Curve
A supply curve is the line or graph joining all the points of the supply levels at various prices of commodities.

Supply curve can be defined as the graphic representation of the relationship between price of a commodity and the quantities supplied by the supplier.

The quantities supplied are measured by the horizontal axis and prices of the commodity on the vertical axis.

From the above supply schedule of rice, we can draw the supply curve. We can start with the price as 'zero' and quantity supplied also as zero. So, the supply curve will be like this as represented below.

The supply curve will be raising upwards as and when prices increase, because the supplier will go on increasing  the supply quantity with every increase in price unless he is unable to do so because of other factors affecting supply.

Regarding factors affecting supply, you may view the information at this link.

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