Question

State and explain the law of supply with exceptions.

Explain the law of supply and its exceptions.

Discuss any two exceptions to the law of supply.

State one exception to the law of supply.

Answer 1

The law of supply is also a fundamental principle of economic theory like the law of demand. It was introduced by Prof. Alfred Marshall in his book, ‘Principles of Economics’ which was published in 1890. The law explains the functional relationship between price and quantity supplied.

Statement of the Law:

“Other things being constant, higher the price of a commodity, more is the quantity supplied and lower the price of a commodity less is the quantity supplied”.

In simple words, “other factors remaining constant, a rise in price results in a rise in the quantity supplied and vice-versa. Thus, there is a direct relationship between price and quantity supplied.

Symbolically,

• Sx = f(Px)
• S = Supply
• x = Commodity
• f = Function
• P = Price of the commodity

The law of supply is explained with the help of the following schedule and diagram:

Price of commodity x (in ₹)	Supply of commodity x (in kgs.)
10	100
20	200
30	300
40	400
50	500

The above table explains the direct relationship between the price and quantity of commodity supplied. When the price rises from ₹ 10 to 20, 30, 40 and 50, the supply also rises from 100 to 200, 300, 400 and 500 units respectively. It means, when the price rises supply also rises and when the price falls supply also falls. Thus, there is a direct relationship between price and quantity supplied which is shown in the following figure:

In the above figure, X-axis represents the quantity supplied and Y-axis represents the price of the commodity. Supply curve 'SS' slopes upwards from left to right which has a positive slope. It indicates a direct relationship between price and quantity supplied.

Exceptions to the Law of Supply:

1) Supply of labour:
Labour supply is the total number of hours that workers work at a given wage rate. It is represented graphically by a supply curve. In the case of labour, as the wage rate rises the supply of labour (hours of work) would increase. So supply curve slopes upward. Supply of labour (hours of work) falls with a further rise in wage rate and the supply curve of labour bends backwards. This is because the worker would prefer leisure to work after receiving a higher amount of wages. Thus, after a certain point when the wage rate rises the supply of labour tends to fall.

It can be explained with the help of a backwards-bending supply curve. The following table and diagram explain the backwards-bending supply curve of labour.

wage rate (₹) per hour	Hours of work per day	The total amount of wages (₹)
100	5	500
200	7	1400
300	6	1800

In the above figure, the supply of labour (hours of work) is shown on X-axis, and the wage rate per hour is shown on the Y-axis. The curve SAS represents the backward bending supply curve of labour. Initially, when the wage rate is ₹ 100 per hour, the hours of work are 5. The total amount of wages received is ₹ 500. When the wage rate rises from ₹ 100 to ₹ 200, hours of work will also rise from 5 hours to 7 hours, and the total amount of wages would also rise from ₹ 500 to ₹ 1400. At this point, the labourer enjoys the highest amount i.e. ₹ 1400 and works for 7 hours. If the wage rate rises further from ₹ 200 to ₹ 300, the total amount of wages may rise, but the labourer will prefer leisure time and denies working for extra hours. Thus, he is ready to work only for 6 hours. At point A, the supply curve bends backwards, which becomes an exception to the law of supply.

2) Agricultural goods: The law of supply does not apply to agricultural goods as they are produced in a specific season and their production depends on weather conditions. Due to unfavourable changes in weather, if agricultural production is low, their supply cannot be increased even at a higher price.

3) Urgent need for cash: If the seller is in urgent need of hard cash, he may sell his product which may even be below the market price.

4) Perishable goods: In the case of perishable goods, the supplier would offer to sell more quantities at lower prices to avoid losses. For example, vegetables, eggs, etc.

5) Rare goods: The supply of rare goods cannot be increased or decreased as per demand. Even if the price rises, the supply remains fixed. For example, rare paintings, old coins, antique goods, etc.