Question

Answer the following about 200 to 250 words each

State and explain the law of supply. What are the exceptions to this law?

Answer 1

The law of supply states that the quantity supplied of a commodity is positively related to the price of the commodity, other things remaining constant. In other words, when the price of a commodity rises (or falls), the quantity supplied will increase (or decrease), other things remaining unchanged.

Algebraically, the law of supply can be expressed as:
$Q_{\mathrm{x}}=f\left(P_{\mathrm{x}},{\overline{\mathit{P}}}_{\mathrm{y}},\overline{\mathit{T}},{\overline{P}}_{\mathrm{i}},\overline{\mathit{G}},{\overline{G}}_{\mathrm{F}},\overline{N_{\mathrm{F}}}\right)$

Where:

Q_x = Quantity supplied of commodity ‘x’
P_x = Price of commodity x
P_y = Price of related goods (Substitutes or complementary goods)
T = State of technology
P_i = Price of inputs, raw materials or cost of production
G = Government policy
N_F = Natural factors
G_F = Goal of the firm

The following are the exceptions to the law of supply.
i. Labour supply - Initially, an increase in the wage rate leads to an increase in labour supply. However, with further increase in the wage rate, labour supply starts falling. This behaviour of labour supply to wage rate leads to a violation of the law of supply.

ii. Savings - Some people may choose to have a fixed flow of income. As a result, they may save less, when the rate of interest is high, and save more, when the interest rate is low. This behaviour violates the law of supply.
iii. Cash requirement - If the seller wants cash immediately, he may be willing to supply more even at a lower price, violating the law of supply.

iv. Agricultural sector - The law does not apply to the agricultural products due to high degree of uncertainty attached to them. For example, whatever be the price, the supply of wheat cannot be increased in the short run, in the event of any natural calamity or crop failure.

v. Expectations about the future - Quantity supplied by a seller depends upon the price expected by the seller to prevail in the market. Thus, if a seller expects that the price will fall in the future, he might increase the quantity supplied at a lower price, violating the law of demand.

vi. Rare articles- Goods, like artistic goods (such as paintings) have limited availability. Accordingly, they do not follow the law of supply.