What is the Law of Supply?
The law of supply states that the sellers are ready to sell more goods at a high market price of a commodity. One can understand the law through the statement that when the price of the commodity rises, the supply of goods also rises. However, if the price of a commodity decreases, then its supply also reduces. Other than the price of the product, all the other factors remain constant in the law of supply. There are some assumptions while defining the law as:
The commodity of products is measurable and accessible in small units.
The income of the seller, as well as the buyer, remains unaffected.
The period under consideration is generally less.
Natural factors remain constant or unchanged.
The preferences of every individual buyer remain unchanged.
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It shows that there is a straight connection between the supply of goods and the price of a commodity while other factors remain stable. However, there are some exceptions to the law of supply, which one should understand.
What are the Exceptions of the Law of Supply?
There are some situations under which the law of supply of goods is not applicable. It means that the supply of goods and the price of a commodity are not proportional. The exception of the law of supply is as mentioned below:
Monopoly
Closure of Business
Perishable Goods
Competition
Agricultural Products
Out of Fashion Goods
Rare Goods
Law of Supply Exceptions Example
Closure of Business - In some circumstances when a business is on the edge of closure, the seller may sell the products even at cheap prices. The retailer does this to clear the supply of stock. In this case, the law of supply does not hold and serves as an exception to the law of supply example.
Agricultural Products - It is challenging to increase the agricultural produce at a certain level as land is a limited resource. It shows that if the prices of land increase, the supply may not get increased.
Monopoly - The situation when there is only one vendor of a service refers to monopoly. The single seller is the price maker and has control over different prices. The seller may not be willing to raise the supply even if the prices are going high, hence it is an exception to the law of supply.
Competition - When there is high competition in the market, the sellers may sell goods in high quantities at low rates. It refers to a situation where the law of supply does not hold.
Perishable Goods - Sometimes sellers are keen to sell perishable or fresh goods even at cheap prices. It is because, for the perishable goods, sellers cannot wait for a long time and if these types of goods remain unsold, then they will face only loss.
Rare Goods - The goods that are precious or artistic generally have a limited supply. The supply of these goods cannot be raised according to the rising prices or demand. Hence, if the price of the goods increases, the supply of such rare goods cannot be raised. It is also an exception to the law of supply example.
Out of Fashion Goods - The up-to-date goods that are in trend often have high prices. However, those goods, which are out of fashion, have cheap prices. The sellers may sell these out of fashion goods even at cheap rates.
Conclusion
Supply refers to the quantity of a commodity offered by a seller or a particular firm at a certain price. Several factors affect the commodity supply including the technology state, input costs, objective of the seller, prices of other goods, and more. There is a law of supply, which expresses a relationship between the market supply and the price of goods.
In some cases, the law of supply example does not hold, which leads to exceptions in this law.
FAQs on Exceptions to the Law of Supply
1. What are the main exceptions to the law of supply in Economics?
Exceptions to the law of supply are situations where the standard rule—that quantity supplied increases with price—does not apply. The supply curve in these cases does not slope upwards. The primary exceptions include:
- Agricultural Goods: Supply is dependent on weather and seasonal factors, not just price.
- Perishable Goods: Sellers may increase supply at lower prices to avoid spoilage.
- Rare Articles: Items like vintage art or antiques have a fixed supply that cannot be increased regardless of price.
- Backward-Bending Labour Supply: After a certain wage level, workers may prefer leisure over more income, reducing labour supply as wages rise.
- Future Price Expectations: Sellers may withhold stock if they expect prices to rise further, or dump stock if they expect prices to fall.
2. Why are agricultural products often considered an exception to the law of supply?
Agricultural products are a key exception because their production is heavily influenced by natural and climatic factors rather than immediate price changes. A farmer cannot instantly increase the supply of a crop like wheat just because its market price has risen. The supply is largely fixed by the harvest cycle. Therefore, even with high prices, the quantity supplied cannot be increased in the short run, thus violating the law of supply.
3. Explain the concept of the backward-bending supply curve of labour.
The backward-bending supply curve of labour is a classic exception to the law of supply. It illustrates the trade-off between work and leisure. Here's how it works:
- Initially, as wages rise, workers are motivated to work more hours to earn a higher income. This is the substitution effect, where work becomes more attractive than leisure.
- However, after reaching a certain high income level, the income effect may start to dominate. Workers may feel they have earned enough and begin to value leisure time more than additional income.
- At this point, if wages continue to rise, workers might choose to work fewer hours to enjoy more leisure. This causes the labour supply curve to bend backwards, showing a decrease in labour supplied at a higher wage rate.
4. How do expectations about future prices create an exception to the law of supply?
Seller expectations about future price movements can directly contradict the law of supply. If sellers anticipate that prices will rise significantly in the future, they might reduce the current quantity supplied, even if current prices are high. They choose to hoard their stock to sell later for a greater profit. Conversely, if they expect prices to crash soon, they may increase the current supply to sell off their inventory quickly, even at falling prices. In both cases, the seller's action is opposite to what the law of supply predicts.
5. Why doesn't the law of supply apply to rare articles like original paintings?
The law of supply does not apply to rare articles because their supply is perfectly inelastic, meaning it is fixed and cannot be changed. For example, there is only one original 'Mona Lisa' painting. No matter how high the price offered for it goes, the quantity supplied will always remain one. The supply of such goods is not determined by production costs or price incentives but by their absolute scarcity. Therefore, a change in price has no effect on the quantity supplied.
6. What is the difference between a 'change in supply' and an 'exception to the law of supply'?
These two concepts are fundamentally different. A 'change in supply' refers to a shift in the entire supply curve caused by factors other than the good's own price, such as changes in technology, input costs, or government policies. In this case, the law of supply itself still holds true along the new curve. An 'exception to the law of supply', however, refers to a situation where the basic principle of the law is violated. It describes cases where a higher price leads to a lower quantity supplied (or vice-versa), causing the supply curve to behave abnormally, like bending backwards or becoming vertical.
7. Do goods for clearance sale follow the law of supply?
No, goods sold during a clearance sale are an exception to the law of supply. The seller's primary motive is to liquidate old stock, perhaps because the goods are going out of fashion or the seller is closing the business. In such a scenario, the seller is willing to supply more goods even at drastically reduced prices to clear inventory. The supply decision is driven by the need to get rid of the stock, not by the opportunity to earn a profit based on price, which goes against the law of supply.
