The Law of Supply is one of the fundamental concepts of economics and forms the backbone of market analysis. It states that, all other things being equal, the quantity supplied of a good increases when its price increases, and decreases when its price falls. This positive relationship between price and supply is the foundation for understanding how markets operate.
Another crucial concept linked to this is the Elasticity of Supply, which measures how responsive the quantity supplied is to changes in price. Together, these ideas are often tested in competitive exams and are important to understand for interpreting real-world economic trends.
Law of Supply
The Law of Supply can be simply stated as:
“Higher the price, higher the quantity supplied, ceteris paribus.”
This happens because when the market price rises, producers are motivated to increase production as it leads to higher potential profits. Conversely, when the price falls, producers reduce supply.
Graphical Representation
The supply curve is generally upward sloping, showing the positive relationship between price and quantity supplied.
This chart shows two types of supply:
- Elastic Supply: Quantity supplied changes significantly when prices change.
- Inelastic Supply: Quantity supplied changes very little when prices change.
Elasticity of Supply
The Price Elasticity of Supply (PES) measures how much the quantity supplied responds to a change in price.
Formula:
Interpretation
- PES > 1: Elastic Supply
- PES < 1: Inelastic Supply
- PES = 1: Unit Elastic
- PES = 0: Perfectly Inelastic
- PES → ∞: Perfectly Elastic
Determinants of Elasticity of Supply
Several factors influence whether supply is elastic or inelastic:
- Time Period: Supply is more elastic in the long run as firms can adjust capacity.
- Spare Production Capacity: More unused capacity → more elastic.
- Availability of Inputs: If inputs are easily available, supply is elastic.
- Flexibility of Production: Industries that can quickly switch between products tend to have higher elasticity.
- Storage Ability: If goods can be stored, firms can adjust supply more flexibly.
Types of Supply Elasticity
| Type of Elasticity | Value of PES | Supply Curve Nature | Example |
| Perfectly Inelastic | 0 | Vertical | Land, rare art |
| Relatively Inelastic | 0 < PES < 1 | Steep curve | Agricultural output in short run |
| Unitary Elastic | PES = 1 | 45° curve | Theoretical |
| Relatively Elastic | PES > 1 | Flatter curve | Manufactured goods |
| Perfectly Elastic | ∞ | Horizontal | Ideal competitive markets |
India’s Index of Industrial Production Growth
To understand supply responsiveness, let us consider recent data on India’s Index of Industrial Production (IIP):
| Month | IIP Growth (YoY %) | Manufacturing Growth (YoY %) |
| June 2025 | 1.5 | – |
| July 2025 | 3.5 | 5.4 |
This shows that industrial growth improved from June to July 2025, especially in manufacturing. A more elastic supply response allows industries to quickly increase output when demand rises, preventing inflationary pressures.
Numerical Example
Example:
If the price of a product increases from ₹100 to ₹120 (20% increase), and the quantity supplied rises from 200 units to 260 units (30% increase), then:
This indicates elastic supply, meaning producers respond strongly to price changes.
Importance in Policy & Economy
- Taxation: When supply is elastic, producers cannot easily pass the burden of taxes to consumers.
- Price Controls: Inelastic supply often leads to shortages when price ceilings are imposed.
- Economic Growth: Policies that improve technology, infrastructure, and resource availability increase supply elasticity, boosting long-term growth.
- Inflation Control: If supply is inelastic, demand shocks quickly raise prices. Elastic supply reduces this risk.
FAQs
The Law of Supply states that when the price of a good increases, the quantity supplied also increases, and when the price falls, the quantity supplied decreases, ceteris paribus.
Elasticity of Supply (PES) = % Change in Quantity Supplied ÷ % Change in Price.
The main types are: Perfectly Inelastic, Relatively Inelastic, Unit Elastic, Relatively Elastic, and Perfectly Elastic supply.
It shows how responsive producers are to price changes, which helps in taxation, price control, and policy decisions.
Agricultural products in the short run are often inelastic because farmers cannot instantly change production levels.
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