Law of Supply and Limitations of Law of Supply

Law of Supply

?Other things remaining the same,as the price of a commodity rises, its supply increases; and as the price fals, its supply declines.

Supply function

Supply function of a firm or an industry (a group of firms) is an algebrate expression relating the quantity of a commodity which a seller is willing and able to supply. The supply function can be written as: ?x=f(Px,FE,FP,PR,W,E,N)

Where certain important determinants of supply are: Product price (Px), Factor productivities

or State of Technology(FE), Factor prices(FP), rises of other products related in production(PR), Weather, strikes and other short-run forces(W),Firm'sexpectationsabout

future prospects for prices, costs, sales and the sate of economy in general(E), Number (N)

Limitations of Law of Supply

i.   Future Prices: When the p rice rises and the seller expects the future price to rise further, supply will decline as the seller will be induced to withhold supplies so as to sell later and earn larger profits then.

ii.  Agricultural Output: Law of supply ma y no t apply in case of agricultural commodities as their production cannot be increased at once following price increase.

iii. Subsistence Farme rs: In underdeveloped countries where agriculture is characterised with subsistence farmers, law of supply may not apply.

iv. Factors other than Price not Remaining Constant: The law of supply is stated on the assumption that factors other than the price of the commodity remain constant.