Law of Supply:

Definition of Law of Supply:

There is direct relationship between the price of a commodity and its quantity offered fore sale over a specified period of time. When the price of a goods rises, other things remaining the same, its quantity which is offered for sale increases as and price falls, the amount available for sale decreases. This relationship between price and the quantities which suppliers are prepared to offer for sale is called the law of supply.

Explanation of Law of Supply:

The law of supply, in short, states that ceteris paribus sellers supply more goods at a higher price than they are willing at a lower price.

Supply Function:
The supply function is now explained with the help of a schedule and a curve.

Market Supply Schedule:

Market Supply Schedule of a Commodity: Px 4 3 2 1 QxS 100 80 60 40 (In Dollars)

In the table above, the produce are able and willing to offer for sale 100 units of a commodity at price of $4. As the price falls, the quantity offered for sale decreases. At price of $1, the quantity offered for sale is only 40 units.

Law of Supply Curve/Diagram:

The market supply data of the commodity x as shown in the supply schedule is now presented graphically.

In the figure (5.1) price is plotted on the vertical axis OY and the quantity supplied on the horizontal axis OX. The four points d, c, b, and a show each price quantity combination. The supply curve SS/ slopes upward from left to right indicating that less quantity is offered for sale at lower price and more at higher prices by the sellers not supply curve is usually positively sloped.

Formula for Law of Supply/Supply Function:

The supply function can also be expressed in symbols. QxS = (Px Tech, Si, Fn, X,........) Here:

Qxs = Quantity supplied of commodity x by the producers. = Function of. Px = Price of commodity x. Tech = Technology. S = Supplies of inputs. F = Features of nature. X = Taxes/Subsidies. = Bar on the top of last four non-price factors indicates that these variables also affect the supply but they are held constant.

Example of Law of Supply:

The law of supply is based on a moving quantity of materials available to meet a particular need. Supply is the source of economic activity. Supply, or the lack of it, also dictates prices. Cost of scarce supply goods increase in relation to the shortages. Supply can be used to measure demand. Over supply results in lack of customers. An over supply is often a loss, for that reason. Under supply generates a demand in the form of orders, or secondary sales at higher prices. If ten people want to buy a pen, and there's only one pen, the sale will be based on the level of demand for the pen. The supply function requires more pens, which generates more production to meet demand.

Assumptions of Law of Supply:

(i) Nature of Goods. If the goods are perishable in nature and the seller cannot wait for the rise in price. Seller may have to offer all of his goods at current market price because he may not take risk of getting his commodity perished. (ii) Government Policies. Government may enforce the firms and producers to offer production at prevailing market price. In such a situation producer may not be able to wait for the rise in price. (iii) Alternative Products. If a number of alternative products are available in the market and customers tend to buy those products to fulfill their needs, the producer will have to shift to transform his resources to the production of those products. (iv) Squeeze in Profit. Production costs like raw materials, labor costs, overhead costs and selling and administration may increase along with the increase in price. Such situations may not allow producer to offer his products at a particular increased price.

Limitations/Exceptions of Law of Supply:

Exceptions that affect law of supply may include: (i) Ability to move stock. (ii) Legislation restricting quantity. (iii) External factors that influence your industry.

Importance of Law of Supply:

(i) Supply responds to changes in prices differently for different goods, depending on their elasticity or inelasticity. Goods are elastic when a modest change in price leads to a large change in the quantity supplied. In contrast, goods are inelastic when a change in price leads to relatively no response to the quantity supplied. An example of an elastic good would be soft drinks, whereas an example of an inelastic service would be physicians' services. Producers will be more likely to want to supply more inelastic goods such as gas because they will most likely profit more off of them. (ii) Law of supply is an economic principle that states that there is a direct relationship between the price of a good and how much producers are willing to supply. (iii) As the price of a good increases, suppliers will want to supply more of it. However, as the price of a good decreases, suppliers will not want to supply as much of it. For producers to want to produce a good, the incentive of profit must be greater than the opportunity cost of production, the total cost of producing the good, which includes the resources and value of the other goods that could have been produced instead.

(iv) Entrepreneurs enter business ventures with the intention of making a profit. A profit occurs when the revenues from the goods a producer supplies exceeds the opportunity cost of their production. However, consumers must value the goods at the price offered in order for them to buy them. Therefore, in order for a consumer to be willing to pay a price for a good higher than its cost of production, he or she must value that good more than the other goods that could have been produced instead. So supplier's profits are dependent on consumer demands and values. However, when suppliers do not earn enough revenue to cover the cost of production of the good, they incur a loss. Losses occur whenever consumers value a good less than the other goods that could have been produced with the same resources.

Determinants of Supply:
There are four important Determinants of Supply as under: (i) Technology changes. Technology helps a producer to minimize his cost of production. (ii) Resource supplies. The producer also has to pay for other resources such as raw materials and labor. if his money is short on supplying a certain number of products because of an increase in resource supplies, then he has to reduce his supply. (iii) Tax/ Subsidy. A producer aims to maximize his profit, but an increase in tax will only increase his expenses, decreasing his capacity to buy resource supplies and forcing him to reduce his supply. (iv) Price of other goods produced. A producer may not only produce on product but other products as well. A producer's money is limited and if he increases his supply in one product, he would have to decrease his supply in the other product, no unless his sales increase. Thus: Qxs = (Px) Ceteris Paribus Ceteris Paribus. In economics, the term is used as a shorthand for indicating the effect of one economic variable on another, holding constant all other variables that may affect the second variable.

Law of Variable Proportions/Law of Non Proportional Returns/Law of Diminishing Returns:

(Short Run Analysis of Production):

Definition:
There were three laws of returns mentioned in the history of economic thought up till Alfred Marshall's time. These laws were the laws of increasing returns, diminishing returns and constant returns. Dr. Marshall was of the view that the law of diminishing returns applies to agriculture and the law of increasing returns to industry. Much time was wasted in discussion of this issue. However, it was later on recognized that there are not three laws of production. It is only one law of production which has three phases, increasing, diminishing and negative production. This general law of production was named as the Law of Variable Proportions or the Law of Non-Proportional Returns. The Law of Variable Proportions which is the new name of the famous law of Diminishing Returns has been defined by Stigler in the following words: "As equal increments of one input are added, the inputs of other productive services being held constant, beyond a certain point, the resulting increments of produce will decrease i.e., the marginal product will diminish". According to Samuelson: "An increase in some inputs relative to other fixed inputs will in a given state of technology cause output to increase, but after a point, the extra output resulting from the same addition of extra inputs will become less".

Assumptions:
The law of variable proportions also called the law of diminishing returns holds good under the following assumptions: (i) Short run. The law assumes short run situation. The time is too short for a firm to change the quantity of fixed factors. All the, resources apart from this one variable, are held unchanged in quantity and quality. (ii) Constant technology. The law assumes that the technique of production remains unchanged during production. (iii) Homogeneous factors. Each factor unit in assumed to he identical in amount and quality.

Explanation and Example:

The law of variable proportions is, now explained with the help of table and graph.

Schedule:
Fixed Inputs (Land Capital) Variable Resource (labor) Total Produce (TP Quintals) (MP Quintals) Average Product (AP Quintals) 30 30 1

Marginal

Product

2 10 25 10 15 Increasing marginal return 10 12.5 30 30 30 30 30 3 4 5 6 7 37 47 55 60 63 12 10 8 5 3 Diminishing marginal returns 12.3

11.8 11.0 10.0 9.0 30 30 8 9 63 62 0 -1 Negative marginal returns 7.9 6.8

In the table above, it is assumed that a farmer has only 30 acres of land for cultivation. The investment on it in the form of tubewells, machinery etc., (capital) is also fixed. Thus land and capital with the farmer is fixed and labor is the variable resource.

As the farmer increases units of labor from one to two to the amount of other fixed resources (land and capital), the marginal as well as average product increases. The total product also increase at an increasing rate from 10 to 25 quintals. It is the stage of increasing returns. The stage of increasing returns with the employment of more labor does not last long. It is shown in the table that with the employment of 3rd labor at the farm, the marginal product and the average product (AP) both fall but marginal product (MP) falls more speedily than the average product AP). The fall in MP and AP continues as more men are put on the farm. The decrease, however, remains positive up to the 7th labor employed. On the employment of 7th worker, the total production remains constant at 63 quintals. The marginal product is zero. if more men are employed the marginal product becomes negative. It is the stage of negative returns. We here find the behavior of marginal product (MP). it shows three stages. In the first stage, it increases, in the 2nd it continues to fall and in the 3rd stage it becomes negative.

Three Stages of the Law:

There are three phases or stages of production, as determined by the law of variable proportions: (i) Increasing returns. (ii) Diminishing returns. (iii) Negative returns.

Diagram/Graph:
These stages can be explained with the help of graph below:

(i) Stage of Increasing Returns. The first stage of the law of variable proportions is generally called the stage of increasing returns. In this stage as a variable resource (labor) is added to fixed inputs of other resources, the total product increases up to a point at an increasing rate as is shown in figure 11.1. The total product from the origin to the point K on the slope of the total product curve increases at an increasing rate. From point K onward, during the stage II, the total product no doubt goes on rising but its slope is declining. This means that from point K onward, the total product increases at a diminishing rate. In the first stage, marginal product curve of a variable factor rises in a part and then falls. The average product curve rises throughout .and remains below the MP curve. Causes of Initial Increasing Returns: The phase of increasing returns starts when the quantity of a fixed factor is abundant relative to the quantity of the variable factor. As more and more units of the variable factor are added to the constant quantity of the fixed factor, it is more intensively and effectively used. This causes the production to increase at a rapid rate. Another reason of increasing returns is that the fixed factor initially taken is indivisible. As more units of the variable factor are employed to work on it, output increases greatly due to fuller and effective utilization of the variable factor. (ii) Stage of Diminishing Returns. This is the most important stage in the production function. In stage 2, the total production continues to increase at a diminishing rate until it reaches its maximum point (H) where the 2nd stage ends. In this stage both the marginal product (MP) and average product of the variable factor are diminishing but are positive. Causes of Diminishing Returns:

The 2nd phase of the law occurs when the fixed factor becomes inadequate relative to the quantity of the variable factor. As more and more units of a variable factor are employed, the marginal and average product decline. Another reason of diminishing returns in the production function is that the fixed indivisible factor is being worked too hard. It is being used in non-optima! proportion with the variable factor, Mrs. J. Robinson still goes deeper and says that the diminishing returns occur because the factors of production are imperfect substitutes of one another. (iii) Stage of Negative Returns. In the 3rd stage, the total production declines. The TP, curve slopes downward (From point H onward). The MP curve falls to zero at point L2 and then is negative. It goes below the X axis with the increase in the use of variable factor (labor). Causes of Negative Returns: The 3rd phases of the law starts when the number of a variable, factor becomes, too excessive relative, to the fixed factors, A producer cannot operate in this stage because total production declines with the employment of additional labor. a rational producer will always seek to produce in stage 2 where MP and AP of the variable factor are diminishing. At which particular point, the producer will decide to produce depends upon the price of the factor he has to pay. The producer will employ the variable factor (say labor) up to the point where the marginal product of the labor equals the given wage rate in the labor market.

Importance:
The law of variable proportions has vast general applicability. Briefly: (i) It is helpful in understanding clearly the process of production. It explains the input output relations. We can find out by-how much the total product will increase as a result of an increase in the inputs. (ii) The law tells us that the tendency of diminishing returns is found in all sectors of the economy which may be agriculture or industry. (iii) The law tells us that any increase in the units of variable factor will lead to increase in the total product at a diminishing rate. The elasticity of the substitution of the variable factor for the fixed factor is not infinite. From the law of variable proportions, it may not be understood that there is no hope for raising the standard of living of mankind. The fact, however, is that we can suspend the operation of diminishing returns by continually improving the technique of production through the progress in science and technology.