Question

Mention two assumptions of the law of supply.

State the assumptions of the law of supply.

 

Answer 1

1. No change in the price of factors of production: Wages, rent, interest, and cost of raw materials remain constant.
2. No change in technology: The state of technology used in production is assumed to be constant.
3. No change in government policy: Policies regarding taxation, subsidies, or trade restrictions remain unchanged.
4. No change in prices of related goods: The prices of substitutes and complementary goods remain constant.
5. No change in climate or natural factors: Particularly important for agricultural commodities, climatic conditions are assumed to remain normal.
6. Perfect competition in the market: It is assumed that there is free entry and exit of firms, and no single producer can influence the market price.