Economics Notes For SSC CGL / CHSL /RBI /SBI Exam 2019-20 on : Law of supply

The relationship between price and quantity supplied is usually a positive relationship. A rise in price is associated with a rise in quantity supplied.

Definitions

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— In the words of Dooley. “The law of supply states that other things being equal the higher the price, the greater the quantity supplied or the lower the price, the smaller the quantity supplied.”

— According to Lipsey, “The law of supply states that other things being equal, the quantity of any commodity that firms will produce and offer for sale is positively related to the commodity’s own price, rising when price rises and falling when price falls.”

 As the price of good increases, suppliers will attempt to maximize profits by increasing the quantity of the product sold.

Determinants of supply

Innumerable factors and circumstances could affect a seller’s willingness or ability to produce and sell a good. Some of the more common factors are:

1. cost factor of production

Cost of production depends on the factors like

·         price of raw materials

·         rents and interest on capital

·         cost of machinery

·         payments to human resources (wages and salaries)

·         transportation charges

If cost of production is high normally supply will be low

2.  state of technology

Use of latest technology decreases the cost of production and increases the production capacity which increases supply of goods.

 3. factors outside the economic sphereSupply depends upon the below said factors. These factors should not arise if they arise; they affect the supply directly or indirectly.

·         Whether conditions

·         Floods

·         Wars

·         Epidemics (unexpected situations)

          
  4.tax and subsidyIf tax subsidy (charge less tax) is given by the government the production cost decreased. If that is not there production cost raises. Finally the production will be low and effects to decrease in supply.

Supply Function

The supply function is the mathematical expression of the relationship between supply and those factors that affect the willingness and ability of a supplier to offer goods for sale

 SX = Supply of goods

 PX = Price

PF = Factor input employed (used) for production.

·         Raw material

·         Human resources

·         Machinery

 O =  Factors outside economic sphere.

T = Technology.

t = Taxes.

S = Subsidies              

 

There is a functional (direct) relationship between price and supply.

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