What Is the Law of Supply
The two basic laws of economics are demand and supply. Every economic episode is based on the interaction of demand and supply. The supply law states that the quantity of goods supplied will rise as the market price raises and vice versa. The main function of market is to find equilibrium between demand and supply. The law of supply puts a limit on the consumers by always trying to maintain lower prices than the current price.
Supply is a little difficult to understand because most of the consumers have less understanding of the market demands and supplies. When the prices increases the supplier tends to increase the production since he can give reason for the higher costs that are involved in producing goods. It is good if the producer can sell the same volume of goods at an increased price keeping other things constant. In this case the supplier makes good profit.
The straight relation of this law is those sellers who have the ownership of resources are willing and able to sell more goods. On the other hand if we look at the scientific view it says that price decides the quantity of goods sold. In simple words if there is a change in the price then it directly leads to a change in the quantity of goods sold.
There are number of factors that affect supply. Let’s discuss the main factors.
Price: this is the main factor that affects the supply. It is not only the price of supply, but the price of production that also affects the law of supply. Producing goods involves taking into account factors like labor, raw material availability etc. If the cost of acquiring these things goes up then the production costs also rises, which in turn affects the supply prices also.
Production Technology involved: production technology is considers as a part of process. This helps in efficiency of production thereby decreasing the cost of labor if the company goes in for automation of production floor. By automating the dependency on labor comes down and the same amount can be utilized in some other input required for production.
Producer’s potential: it is not just producing goods and supplying them, it also depends on the expectations of the producer as well. They should be well aware of current and future requirement in the market so that they can live up to the expectations. If the producer’s expectations do not match the supplier then if greatly affects the law of supply.
Volume of producer’s in the market: law of supply is also dependent on the number of producer’s available in the market. More producers means higher competition that there is reduction in supply, while less the number then there is larger supply and the producer’s also can have a larger share. For any economy to have an equilibrium both law of supply and law of demand should go hand in hand.