What is the Law of Supply? – 6 Factors Behind

I’m sure, you must have read of some basic economic concepts like demand and supply during your school age. The knowledge given then is too limited. However, those looking to make a career in economics go for higher studies and gain a better understanding of all these.

However, I think even if you are not an economics student or have not attained any specific qualification, but are interested in business; you must clear your concepts.

Here I’ll focus on the law of supply because it’s one of the most significant microeconomic laws. It asserts on the premise that when other factors stay constant, there is a positive relationship between the cost of goods and services and the amount of products and services supplied. According to the economic rule of supply, the quantity of an item or service that suppliers are capable of and willing to offer for sale will increase as the price of that good or service expands, ceteris paribus (all other things being equal). On the other hand, when a product or service’s price drops, so does the amount of that good or service that suppliers are willing and able to sell.

A supply curve establishes the link between the price and the quantity delivered. The rule of supply also serves as a framework for how markets work and how pricing is established.

The illustration of the law of supply is the market for apples. To make you understand, let me explain an instance of how apple farmers are motivated to cultivate more apples if apple prices expand because they can benefit more from doing so.

They might achieve this through cultivating and broadening their orchards, using more herbicides and fertilizer, or investing in new technology to improve their harvests exponentially. The number of apples supplied to the market would increase.

In contrast, if apple prices decline, some apple cultivators might decide to scale back their operations since they might not be able to meet their expenses or turn a profit. The number of apples provided to the market would decline as a result of this decrease in output.

The petrol market offers another illustration. Oil corporations are encouraged to manufacture more petrol if the price of petrol increases, which can cultivate a larger profit. They might gain or take advantage of this by drilling for more oil, constructing new refineries, or improving the productivity of their current facilities. The quantity of petrol provided to the market would ultimately improve.

In alteration, some oil corporations may also decide to scale back or hold their output if the price of petrol collapses since they might not be able to afford their costs or turn a profit. The quality of petrol stipulated in the market would reduce as a result of this reduction in output.

I’ll Explain the Factors Affecting the Law of Supply

The law of supply operates or relies on the notion that all other factors remain constant. This insinuates that it holds when there are no alterations in the other factors that impact the supply of a good or service. The supply of goods or services can be determined by several factors, which may eventually impact the relationships between price and the amount to be delivered.

The Icy Whiz team talked to Javier Muniz, CTO at LLCAttorney, about the role of technology in shaping the law of supply in the contemporary economy. Here is what he said:

“I believe that the role of technology in shaping the law of supply in today’s economy is of paramount importance.

Incorporating my experience as the Chief Technology Officer at LLCAttorney.com, and various roles with influential technology companies, three primary examples come to mind.

1. The advent of data analytics has enabled precise demand forecasting, helping suppliers adjust quantities accordingly. Platforms like Microsoft Azure or Google Cloud facilitate the processing of large-scale consumer data for more accurate supply models. 
2. Digital platforms are bridging the gap between suppliers and consumers. This direct connection, facilitated by platforms such as Amazon or Alibaba, allows for real-time adjustment to supply, based on immediate insights into consumer behavior.
3. Advancements in technology have expanded the geographical reach of supply chains. Companies can now supply goods and services to regions previously inaccessible, due to innovations like drone delivery or digital service platforms.

These tech-led advancements dovetail with policy decisions and natural disasters in significant ways, potentially either mitigating or exacerbating these external factors. I believe considering the interplay of technology with these elements is key to understanding modern supply dynamics.”

1. Production Costs

The law of supply can be impacted by multiple fundamental factors, notably production costs. In general, if your good or service’s production costs expand, manufacturers may supply a reduced of that good or service, even if the cost of the good or service stays constant, affecting supply.

This is related to the possibility that enhancing production costs will make products or services less profitable to manufacture. This makes it less appealing for producers to sell them to the market.

For example, some wheat farmers could decide to lower their production or vacation the market altogether if the price of wheat remains stable. But, the cost of producing wheat improves as a result of drought or an upsurge in fertilizer prices. This is because they are not able to pay for their costs or produce a profit at the current price.

2. Technology

Another crucial factor that can affect and influence the law of supply is technology. Can you even imagine working without this? Even though price remains constant, technological innovations have the potential to improve production efficiency, minimize expenses, and enhance the amount of the thing or service given.

For example, recent developments in manufacturing technology may reduce the sum of time and labor required to produce a good product, cutting production costs and maximizing profitability.

Even if the price continues the same, this may encourage businesses to generate more of the good. Similarly, enhancements in agricultural technology may boost crop yields and lower crop production costs, raising the number of agricultural products accessible on the market.

On the other side, even if your good or service is costly, a lack of technological breakthroughs may limit the amount that is provided. For instance, if oil extraction technology fails to advance, the cost of producing oil may continue to be elevated, which may limit the amount of oil offered to the market.

Overall, technology can have a major impact on the law of supply and play a big part in choosing the quantity of an item or service provided. Technological developments may inspire businesses like yours to supply additional goods or services even when the pricing is the same by boosting production efficiency and lowering expenses.

Jason Woo, the Founder of Able Hardware, shared his views on the complexities of today’s economic supply landscape. Here is an excerpt from the interview:

“Navigating the complexities of today’s economic supply landscape, I’ve witnessed first-hand how technological advancements, policy changes, and even natural disasters play significant roles.

As the Founder of Able Hardware, a successful metal fabrication manufacturer, I’ve cultivated over two decades of experience dealing with these factors.

For instance, the adoption of state-of-the-art Japanese technology in our surface treatment line reshaped our production efficiency and capability, ultimately increasing our annual exports.

Government policies, on the other hand, dictate our sourcing decisions since changes in import/export regulations or taxes can significantly impact manufacturing costs.

Lastly, natural disasters and global crises, like the recent pandemic, are potent disruptors. In 2020, we faced serious supply chain interruptions, leading us to diversify our sourcing strategies and invest more in risk management.

Thus, a synergy of cutting-edge technology, policy adaptation, and disaster-proof strategies shapes our supply courses.

These factors don’t operate in silos; indeed their interaction charts the future for businesses, influences policymaking, and affects the final goods or services delivered to consumers.

From my vantage point, understanding these dynamics is crucial for any business to thrive, irrespective of industry or scale.”

3. Government Policies

Government policies such as taxes, subsidies, and regulations also have a significant impact on the supply of your goods or services. Government grants to promote particular goods decrease the total cost of production. Government taxation is another factor that may enhance production costs.

To formulate effective policies, policymakers must have an in-depth comprehension knowledge of the law of supply. Government policies may profoundly impact the supply of products and services.

According to the law of supply, more of a thing or service will be offered at the same price if all other variables remain constant. Government policy may affect the supply of goods and services in a number of ways, either directly or indirectly.

4. Natural Disasters

You can’t predict anything about this factor. A natural disaster can have an important impact on the supply of goods and services, as you might already know. In many cases, government intervention may be necessary to help restore the supply of essential goods and services to affected areas.

Natural catastrophes can alter the supply of commodities and services in a given area, which could impact the market’s equilibrium. When all other factors are equal, the law of supply states that when an item or service’s cost rises, so does the amount that is supplied of it.

Natural disasters include the destruction of infrastructure, disruption of production, increase in demand, transportation issues, etc.

5. Changes in the Number of Producers

When all other circumstances are equal, the law of supply states that an increase in the prices of an item or service frequently results in an increase in the quantity provided for that good or service. On the other hand, a decline in the prices frequently results in a reduction in the amount delivered.

There are changes in the number of producers may have the following effect on the availability of products and services under the law of supply, including entry barrier, market concentration, increase or decrease in the number of productions,

Understanding the factors that determine the number of producers in a market is vital for policymakers and businesses to make wise decisions since changes in the number of producers can have a considerable effect on the supply of goods and services.

6. Expectations

Can you run away from this factor? No. When all other variables are equal, the law of supply states that when an item or service’s price increases, so does the amount supplied. The behavior of producers and their desire to provide goods and services can be influenced by expectations about future prices and market conditions.

Overall, the law of supply is influenced by a variety of factors, and understanding these factors is important for understanding how markets work and how changes in supply can affect prices and quantities in the market.

The law of supply, which has been cited as a key economics principle or idea. It states that all other factors being equal, producers will produce significantly more of a good or service as its price rises; conversely, producers will produce significantly less of a good or service as its price declines.

If I perceive it in another light, producers are driven to raise production when a product’s price grows to gain more advantages from the higher cost and raise their profit. Whereas, producers are encouraged to scale back production when a product’s price declines since they may not be able to make up their costs or generate a profit.

One of the cornerstones of microeconomics, the rule or the law of Supply serves to explain how the marketplace for goods or services.

Guest Author: Saket Kumar

Last Updated on May 16, 2024 by Pragya