What are the assumptions to the law of supply?

Answer 1

1) Natural Factors:

The supply of a commodity depends on the natural environment. The supply of agricultural product is affected adversely by weather, natural calamities like flood, cyclone etc. On the other hand adequate rainfall and good weather etc. increase supply.

(2) Method of Production:

Method of production affects the supply of a commodity by reducing the cost of production. Due to modern method of production cost of production diminishes and the price of the commodity almost remains constant. As a result profit margin rises. Being lured by the windfall profit producers produce more and offer more for sale.

(3) Fall in the Factor Prices:

Supply of a commodity also increases due to the fall in the price of factors of production meant for its production. The prices of factors of production constitute a part of the total cost of production. Due to the fall in the factor cost production cost is reduced with reduced costs the supply of goods rises.

(4) Prices of other goods:

There are certain commodities which are in nature of substitutes and complementary. In case of a substitute the producer will substitute the commodity whose price has fallen. The resources will be diverted from the supply of substitute commodity whose price has fallen.

(5) Number of firms:

If the number of firms producing commodity increases, the market supply curve shifts downward. In the short run the existing firms reap abnormal profit. But lured by the abnormal profit the competitive firms enter the market to produce the same commodity. This raises the supply; likewise the competitive firms leave the market due to loss. So the supply diminishes.

(6) Expectation of future price:

The supply of a commodity depends on the future expectation of price. If the price in expected to fall, the sellers will supply more at a low price and if the price is expected to rise in future, the seller will sell less and store for future sale.

eIshphaq R Pla

Kashmir India

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