What Is The Fundamental Assumption Upon Which The Law Of Supply Is Based?
What is the fundamental assumption upon which the Law of Supply is based? The higher the demand for a product the more of it will be produced by sellers.
What is the first and foremost assumption of the law of supply?
Assumptions of Law of Supply Law of supply refers to that state where other things remaining the same as the price of the product is increased the supply of the product will increase and when the price of product decrease it leads to decrease in the supply of product. Law of supply has many assumptions let’s look at some of the assumptions of law of supply –
The first and foremost assumption of law of supply is that there is no change in the cost of production for the firm because if the cost of production increases than it will lead to company making same number of units even when the price of product has increased because as far as company is concerned for them their profit margin will be same due to rise in cost of production. Conversely, if the cost of production decreases then the company can increase production even price of the product has not increased because the profit margin as far as the company is concerned is same.The state of technology should be static because if technology improves than company due to improvement in technology can produce at a lower cost per unit which in turn can lead to increase in production without an increase in the price of the product.Another assumption of law of supply is that the number of firms present in the market should remain the same because if the number of firms selling same product increases than it will result in increase in production of the product without any corresponding rise in price and conversely if the number of firms declines then it will result in decrease in the supply without any decrease in price of the product.Another assumption is that the seller’s expectations regarding the future price of product should not change because if seller expects further rise in price of the product in future than he or she will not increase supply the product even when price is increased and conversely if seller expects further decline in price than he or she will not decrease the supply even when price of products are reduced.Another assumption is that there is no change in taxation policy of the government because if the government increases the tax on production then it will increase the cost of production which will lead to fall in production even when there is no increase or decrease in price and conversely if government reduces taxes or increases subsidies than it will lead to fall in the production cost leading to rise in the production without any rise in the price of product.
As one can see from the above that law of supply is based on many assumptions and it is together with the law of demand is a key concept of economics when it comes to determination of the price of the product in the market. : Assumptions of Law of Supply
What are the assumptions on which the law is based?
Assumptions of Law of Supply : –
- While stating law of supply the phrase ‘keeping other factors constant or ceteris paribus’ are used. This phrase is used to cover the following assumptions on which the law is based:
- 1. Price of other goods are constant;
- 2. There is no change in the state of technology;
- 3. Prices of factors of production remain the same;
- 4. There is no change in the taxation policy;
5. Goals of the producer remain the same. Law of supply can be better understood with the help of Table 9.3 and Fig.9.3: Table 9.3: Supply Schedule:
| Price (in Rs.) | Quantity (in units) |
|
|
Table 9.3 clearly shows that more and more units of the commodity are being offered for sale as the price of the commodity is increased. As seen in Fig.9.3, supply curve SS slope upwards from left to right, indicating direct relationship between price and quantity supplied.
Important Points about Law of Supply : 1. It states the positive relationship between price and quantity supplied, assuming no changes in other factors.2. It is a qualitative statement, as it indicates the direction of change in the quantity supplied, but it does not indicate the magnitude of change.3.
It does not establish any proportional relationship between change in price and the resultant change in quantity supplied.4. Law is one sided as it explains only the effect of change in price on the supply, and not the effect of change in supply on the price.
What is the law of supply?
Assumptions of Law of Supply Law of supply refers to that state where other things remaining the same as the price of the product is increased the supply of the product will increase and when the price of product decrease it leads to decrease in the supply of product. Law of supply has many assumptions let’s look at some of the assumptions of law of supply –
The first and foremost assumption of law of supply is that there is no change in the cost of production for the firm because if the cost of production increases than it will lead to company making same number of units even when the price of product has increased because as far as company is concerned for them their profit margin will be same due to rise in cost of production. Conversely, if the cost of production decreases then the company can increase production even price of the product has not increased because the profit margin as far as the company is concerned is same.The state of technology should be static because if technology improves than company due to improvement in technology can produce at a lower cost per unit which in turn can lead to increase in production without an increase in the price of the product.Another assumption of law of supply is that the number of firms present in the market should remain the same because if the number of firms selling same product increases than it will result in increase in production of the product without any corresponding rise in price and conversely if the number of firms declines then it will result in decrease in the supply without any decrease in price of the product.Another assumption is that the seller’s expectations regarding the future price of product should not change because if seller expects further rise in price of the product in future than he or she will not increase supply the product even when price is increased and conversely if seller expects further decline in price than he or she will not decrease the supply even when price of products are reduced.Another assumption is that there is no change in taxation policy of the government because if the government increases the tax on production then it will increase the cost of production which will lead to fall in production even when there is no increase or decrease in price and conversely if government reduces taxes or increases subsidies than it will lead to fall in the production cost leading to rise in the production without any rise in the price of product.
As one can see from the above that law of supply is based on many assumptions and it is together with the law of demand is a key concept of economics when it comes to determination of the price of the product in the market. : Assumptions of Law of Supply
Why is the law of supply valid if the cost is constant?
4. Cost of production be unchanged: – It is assumed that the price of the product changes, but there is no change in the cost of production. If the cost of production increases along with the rise in the price of product, the sellers will not find it worthwhile to produce more and supply more.
What is the first and foremost assumption of the law of supply?
Assumptions of Law of Supply Law of supply refers to that state where other things remaining the same as the price of the product is increased the supply of the product will increase and when the price of product decrease it leads to decrease in the supply of product. Law of supply has many assumptions let’s look at some of the assumptions of law of supply –
The first and foremost assumption of law of supply is that there is no change in the cost of production for the firm because if the cost of production increases than it will lead to company making same number of units even when the price of product has increased because as far as company is concerned for them their profit margin will be same due to rise in cost of production. Conversely, if the cost of production decreases then the company can increase production even price of the product has not increased because the profit margin as far as the company is concerned is same.The state of technology should be static because if technology improves than company due to improvement in technology can produce at a lower cost per unit which in turn can lead to increase in production without an increase in the price of the product.Another assumption of law of supply is that the number of firms present in the market should remain the same because if the number of firms selling same product increases than it will result in increase in production of the product without any corresponding rise in price and conversely if the number of firms declines then it will result in decrease in the supply without any decrease in price of the product.Another assumption is that the seller’s expectations regarding the future price of product should not change because if seller expects further rise in price of the product in future than he or she will not increase supply the product even when price is increased and conversely if seller expects further decline in price than he or she will not decrease the supply even when price of products are reduced.Another assumption is that there is no change in taxation policy of the government because if the government increases the tax on production then it will increase the cost of production which will lead to fall in production even when there is no increase or decrease in price and conversely if government reduces taxes or increases subsidies than it will lead to fall in the production cost leading to rise in the production without any rise in the price of product.
As one can see from the above that law of supply is based on many assumptions and it is together with the law of demand is a key concept of economics when it comes to determination of the price of the product in the market. : Assumptions of Law of Supply
What is the law of supply?
Assumptions of Law of Supply Law of supply refers to that state where other things remaining the same as the price of the product is increased the supply of the product will increase and when the price of product decrease it leads to decrease in the supply of product. Law of supply has many assumptions let’s look at some of the assumptions of law of supply –
The first and foremost assumption of law of supply is that there is no change in the cost of production for the firm because if the cost of production increases than it will lead to company making same number of units even when the price of product has increased because as far as company is concerned for them their profit margin will be same due to rise in cost of production. Conversely, if the cost of production decreases then the company can increase production even price of the product has not increased because the profit margin as far as the company is concerned is same.The state of technology should be static because if technology improves than company due to improvement in technology can produce at a lower cost per unit which in turn can lead to increase in production without an increase in the price of the product.Another assumption of law of supply is that the number of firms present in the market should remain the same because if the number of firms selling same product increases than it will result in increase in production of the product without any corresponding rise in price and conversely if the number of firms declines then it will result in decrease in the supply without any decrease in price of the product.Another assumption is that the seller’s expectations regarding the future price of product should not change because if seller expects further rise in price of the product in future than he or she will not increase supply the product even when price is increased and conversely if seller expects further decline in price than he or she will not decrease the supply even when price of products are reduced.Another assumption is that there is no change in taxation policy of the government because if the government increases the tax on production then it will increase the cost of production which will lead to fall in production even when there is no increase or decrease in price and conversely if government reduces taxes or increases subsidies than it will lead to fall in the production cost leading to rise in the production without any rise in the price of product.
As one can see from the above that law of supply is based on many assumptions and it is together with the law of demand is a key concept of economics when it comes to determination of the price of the product in the market. : Assumptions of Law of Supply
Why are the determinants of supply ignored in the law of supply?
9 Main Assumption of the Law of Supply We know that the supply of a commodity depends upon several factors. But price of commodity is considered to be the most important factor which influences the supply of commodity. While analysing the law of supply the determinants of supply other than price of the commodity are ignored because it helps us to analyse the influence of price on the quantity supplied of a commodity in the market.
The law of supply states that, “Ceteris paribus, higher is the price, higher is the quantity supply and lower is the price, lower is the quantity supply.” In other words, the law says that, “Other things remaining same, as the prices of the commodity rise, the supply extends and as the prices fall, the supply contracts.” Symbolically, the law states, S x oc P x, Ceteris paribus where S x stands for the supply of commodity X and P x the price of commodity.
In other words, law of supply establishes a positive relationship between price and supply.
What is the most important factor that influences supply of commodity?
9 Main Assumption of the Law of Supply We know that the supply of a commodity depends upon several factors. But price of commodity is considered to be the most important factor which influences the supply of commodity. While analysing the law of supply the determinants of supply other than price of the commodity are ignored because it helps us to analyse the influence of price on the quantity supplied of a commodity in the market.
The law of supply states that, “Ceteris paribus, higher is the price, higher is the quantity supply and lower is the price, lower is the quantity supply.” In other words, the law says that, “Other things remaining same, as the prices of the commodity rise, the supply extends and as the prices fall, the supply contracts.” Symbolically, the law states, S x oc P x, Ceteris paribus where S x stands for the supply of commodity X and P x the price of commodity.
In other words, law of supply establishes a positive relationship between price and supply.