Law of supply

Presented by: dudhat kenal s.

Std: IMBA SEM-3
Definition:
• “Other things remaining same, when price of a
commodity increases its quantity supplied increases
and if price of a commodity decreases, quantity
supplied also decreases”.

• There exist a positive and direct relationship

between price and quantity supplied of a
commodity. Following terminologies are used while
expressing law of supply:
• Quantity supplied=Qs
• Price=P
Cases of rise and fall in supply or determinant of
supply

• We assume some factors constant while describing law of supply, those

factors are known as determinants of supply. Some of them are described
below.
1) Change in factors prices.
2) Change in Technology.
3) Means of transport and
communications.
4) Scientific Development.
5) Union of Sellers.
6) Trade Policy.
7) Industrial Expansion.
8) Change in price of a Substitute.
Determinants of Supply

• Technology
▫ If more efficient technology is discovered
production costs will fall
▫ So suppliers will be more willing and able to
supply more of the good at each price
• Price of Relevant Resources
▫ Those resources employed in the production of a
good.
Determinants con…

• Prices of Alternative Goods

▫ Price of good that use some of the same resources
as used to produce the good in question
• Producer Expectations
▫ Shift production according to future prices
• Government Restrictions
▫ Taxes, quotas, licenses, etc.
Assumptions
• Following are assumptions of law of supply
which are held constant while describing law of
supply.
1. No Change in cost of Production
2. No Change in technology
3. No Change in climate
4. No Change in Price of Substitutes
5. No Change in Natural Resources
Explanation
• Let’s see this example to understand law of
supply. Assume that you are a farmer and you
are producing wheat. If price of per bushel of
wheat is $1 you will only produce 5 bushels of
wheat, if price increases to $2 you will increase
your supply to 20 bushels, And if price again
increases to $3 you will produce 35 bushels, And
at $4 you will produce 50 bushels And if price
are at their top i.e $5 then you will produce 60
bushels. You can see the table below.
Explanation
P

S
P Qs
$5 100

Price (per latte)

4 80

3 60

2 40

1 20

10 20 30 40 50 60 70 Q
Quantity Supplied (lattes per month)
 Change in Supply
• There are two type of changes in Supply. The one is
movement of supply or extension and
contraction of supply and other is shift in
supply.
• Movement of supply:

Other things remaining same, All change in quantity

supplied resulting from the change in price factor, is
called the movement of supply. If supply curve
moves on left side then it means that supply
decreases and if curve moves toward right side it
shows that supply increases.
 • Let consider the above exampl
e
when price moves from $1 to 2,3,4,5
Quantity Supplied increases from
5kg to 20,35,50&60Kg this is known
as extension of supply and if we see
this phenomena from reverse side
when price is decreasing from 5$ to
1$ Quantity supplied is also
decreasing from 60 to 5Kg. This is
known as Contraction of supply. Let
see it clearly through diagram.
 Chart Title

5 5

4 4
Price

3 3

2 2

1 1

0
5 20 35 50 60
conclusion