Law of Supply - Definition, Types and Formula
Law of supply is an important principle in economics which describes that there is a proportional relationship between product price and the quantity of product supplied in the market, assuming that factors that could affect this relationship remain unchanged.
That is to say, as the product price increases, the quantity of product supplied also increases. And as the price falls, the quantity supplied will consequently fall. This price-supply relationship in the law of supply determines how producers respond to price changes in a competitive market.
How the Law of Supply Works?
The law of supply can be implemented across most industries. It helps in explaining producer behavior and how they regulate the supply of goods in the market. As soon as the product price increases, the producers see an opportunity to make more profit by producing more of that product.
On the contrary, a consistent rise in prices can also hurt buyer sentiment. As a result, the demand of the product begins to fall, which in turn leads to the decrease in product price. Consequently, the suppliers will produce less and so the quantity supplied in the market decreases, following the law of supply.
Adjusting the production based on frequent price changes as dictated by the law of supply can be tricky, if not managed well. According to a study conducted by Gartner, 40% of the high-performing organizations are implementing automation to optimize their decision-making, which makes it significantly easier to regulate product supply in accordance with changes in product price.
What Factors Influence the Law of Supply?
1. Technological Advancement
Automation of critical functions with ERP software enables business owners to get total control over their company and enhance operational efficiency, helping them increase the supply of goods. Also, new production techniques and emerging technologies allow cost-effective production.
2. Resource Availability
A ready supply of raw materials plays a crucial role in ensuring continuity in production. ERP for electric vehicle manufacturing seamlessly manages suppliers and negotiation procedures, making it easy to manage the procurement of rare earth metals like lithium. However, skilled labor shortage can affect the supply.
3. Government Regulations
Complex and changing government regulations and compliances can be challenging to manage without business management software, thus influencing the supply of products. Moreover, unforeseen events like natural disasters and pandemics can impact the supply chain too.
4. Market Factors
Businesses base their production plans on forecasts of future demand and pricing. An ERP system can help businesses improve demand forecasts by considering factors such as economic growth and seasonal variations. Also, new suppliers may enter the market even if prices are not increasing and demand is stable.
5. Production Costs
The cost of production can significantly rise due to an increase in labor and raw material costs. Frequent breakdowns and faulty production can also impact production. A regular maintenance repair and overhaul not only ensures that the cost of production is in control but also prevents downtime in operations.
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What are the Types of Supply?
There are five types of supply. Let’s discuss each of them.
1. Joint Supply
Joint supply is a type of supply where there is a production of multiple products from a common production process or resource. The quantity of multiple products supplied is dependent on each other, like petrol and diesel, which rely on a common process of oil refining.
2. Composite Supply
This type of supply is when a secondary product or products are supplied along with the primary product and the supply of secondary products is dependent on the primary supply. For example, ERP implementation can only happen if there is proper IT infrastructure and hardware available to run it.
3. Short-Term Supply
In short-term supply, the product being supplied is only available for a limited period, limited by its current production capacity. For example, irrigation water can be in short supply during the dry season, where solutions like Agriculture ERP come in handy to manage scarce water resources, price elasticity and elasticity of demand.
4. Long-Term Supply
When the product is available over an extended period and its production capacity can be adjusted, it is referred to as long-term supply. For example, adequate power grids ensure there is a continuous supply of electricity to consumers, which can be adjusted based on consumer demand.
5. Market Supply
Market supply is the total quantity of goods offered by all producers at a given price over a specified period within a specific market. For example, all the paddy supplied by farmers in the APMC market at a minimum support price(MSP) set by the government during a harvest season.
What is the Law of Demand?
In contrast to the law of supply, the law of demand states that there is an inverse relationship between the price of goods and the product demand in the market. When the product price decreases, there is an increase in product demand and vice versa – assuming that all other factors like customer choice, earnings and price of alternate products stay the same.
The law of demand is graphically represented using demand curve and demand schedule, showcasing the relationship between product price and product demand. Aggregate planning, an effective technique to anticipate demand, helps business owners to align their production, manpower and warehousing requirements.
What is the Difference Between Law of Demand and Law of Supply?