Question

State and explain the law of supply with its assumptions.

Answer 1

The law of supply states that, other things remaining the same, the quantity of any commodity that firms will produce and offer for sale rises with a rise in its price and falls with a fall in its price. In other words, the law of supply states that the higher the price, the larger the quantity supplied, and the lower the price, the smaller the quantity supplied. Therefore, in terms of the law of supply, the quantity supplied of a commodity is positively related to its price. Law of supply is based on the assumption of ‘other things remaining the same’, i.e., the ceteris paribus order assumption. Other things are the determinants of supply other than the own price of the commodity, and they include input prices, technology of production, prices of related goods, taxation policy, goals of production, etc. Law of supply assumes that these other determinants of supply do not change.