Supply Function

The supply function is the mathematical expression of the relationship between supply and those factors that affect the willingness and ability of a supplier to offer goods for sale.

S_X = Supply of goods X

P_X = Price of goods X

P_F = Factor input employed (used) for production.

• Raw material
• Human resources
• Machinery

O = Factors outside economic sphere.

T = Technology. t = Taxes.

S = Subsidies

There is a functional (direct) relationship between price and supply.

Definition: Law of supply states that other factors remaining constant, price and quantity supplied of a good are directly related to each other. In other words, when the price paid by buyers for a good rises, then suppliers increase the supply of that good in the market.

In the Words of Dooley, ―The law of supply states that other things remaining the same, higher the prices the greater the quantity supplied and lower the prices the smaller the quantity supplied‖.

Assumption of the Law :

1. It is assumed that incomes of buyers and sellers remain constant.
2. It is assumed that the tastes and preferences of buyers and sellers remain constant.
3. Cost of all the factors of production is also assumed to be constant.
4. It is also assumed that the level of technology remains constant.
5. It is also assumed that the commodity is divisible.
6. Law of supply states only a static situation.

Description: Law of supply depicts the producer behavior at the time of changes in the prices of goods and services. When the price of a good rises, the supplier increases the supply in order to earn a profit because of higher prices.

The above diagram shows the supply curve that is upward sloping (positive relation between the price and the quantity supplied). When the price of the good was at P4, suppliers were supplying Q3 quantity. As the price starts rising, the quantity supplied also starts rising.