Law of Supply is associated with
production analysis. It explains the
positive relationship between the price of a commodity and the supply of that commodity. For example, if the price of cloth increases, the supply of cloth will also increase. This is due to the fact that when price rises, it is profitable to increase the production and hence supply increases.Law of Supply describes a direct relation between price of a good and the supply of that good.
The Law of Supply can be stated as:“Other things remaining the same, if the price of a commodity increases its quantity supplied increases and if the price of a commodity decreases, quantity supplied also decreases”.
The supply of a commodity depends on the factors such as price of commodity,price of labour, price of capital, the state of technology, number of firms,prices of related goods, and future price expectations and so on. Mathematically the supply function is
Q’s = f (Px, Pr, Pf , T, O, E )
Where Q’s = Quantity supplied of commodity
Px = Price of x Commodity
Pr = Price of related goods
Pf = Price of factors of production
T = Technology
O = Objective of the producer
E = Expected Price of the commodity.
Law of Supply is based on the following assumptions.
*There is no change in the prices of
factors of production *There is no change in price of capital
goods„ Natural resources and their availability remain the same
*Prices of substitutes are constant
*There is no change in technology
*Climate remains unchanged
*Political situations remain unchanged
*There is no change in tax policy
Suppose that the supply function is Qs = f(P) or Q = 20P
P is an independent variable. When its value changes, new values of Q’s can be calculated.