Class 11 Micro Economics Notes · CBSE
Law of Supply
Law of Supply — understanding the direct price-quantity relationship, its assumptions, reasons and exceptions. CBSE Class 11 Microeconomics notes with schedule and graph.
Last updated: 16 Sep 2026
Notes
Statement of the Law
Economists have studied the behaviour of sellers, just as they have studied the behaviour of buyers. As a result of their observations, they have arrived at the law of supply.
Price is the dominant factor in determining supply of a commodity. As price increases, there is more supply of that commodity in the market and vice-versa — this behaviour of producers is studied under the law of supply.
Assumptions of the Law of Supply (Ceteris Paribus)
While stating the law of supply, the phrase 'keeping other factors constant' or 'ceteris paribus' is used. This phrase covers the following assumptions on which the law is based:
Price of other goods is constant.
There is no change in the state of technology.
Prices of factors of production remain the same.
There is no change in the taxation policy.
Goals of the producer remain the same.
Schedule and Curve
| Price (in ₹) | Quantity (in units) |
|---|---|
| 1 | 0 |
| 2 | 10 |
| 3 | 20 |
| 4 | 30 |
| 5 | 40 |
| 6 | 50 |
Fig 9.3: Supply Curve
Table 9.3 clearly shows that more and more units of the commodity are offered for sale as the price is increased. As seen in Fig. 9.3, the supply curve SS slopes upwards from left to right, indicating the direct relationship between price and quantity supplied.
Important Points about the Law of Supply
It states the positive relationship between price and quantity supplied, assuming no changes in other factors.
It is a qualitative statement — it indicates the direction of change in the quantity supplied, but it does not indicate the magnitude of change.
It does not establish any proportional relationship between change in price and the resultant change in quantity supplied.
The law is one-sided — it explains only the effect of change in price on the supply, and not the effect of change in supply on the price.
Reasons for the Law of Supply
The main reasons for the operation of the law of supply are:
The basic aim of producers, while supplying a commodity, is to secure maximum profits. When the price of a commodity increases, without any change in costs, it raises their profits — so producers increase the supply of the commodity by increasing production. On the other hand, with a fall in prices, the supply also decreases as the profit margin decreases at low prices.
A rise in price induces prospective producers to enter into the market to produce the given commodity so as to earn higher profits. An increase in the number of firms raises the market supply. However, as the price starts falling, some firms which do not expect to earn any profits at a low price either stop production or reduce it — it reduces the supply of the given commodity as the number of firms in the market decreases.
When the price of a good increases, the sellers are ready to supply more goods from their stocks. However, at a relatively lower price, the producers do not release big quantities from their stocks — they start increasing their inventories with a view that the price may rise in the near future.
Exceptions to the Law of Supply
As a general rule, the supply curve slopes upwards, showing that the quantity supplied rises with a rise in price. However, in certain cases, a positive relationship between supply and price may not hold true.
If sellers expect a fall in price in the future, then the law of supply may not hold true — the sellers will be willing to sell more even at a lower price. However, if they expect the price to rise in the future, they would reduce the supply of the commodity, in order to supply the commodity later at a high price.
The law of supply does not apply to agricultural goods as their production depends on climatic conditions. If, due to unforeseen changes in weather, the production of agricultural products is low, then their supply cannot be increased even at higher prices.
In the case of perishable goods, like vegetables, fruits, etc., sellers will be ready to sell more even if the prices are falling — it happens because sellers cannot hold such goods for long.
Rare, artistic, and precious articles are also outside the scope of the law of supply. For example, the supply of rare articles like a painting of Mona Lisa cannot be increased, even if their prices are increased.
In economically backward countries, production and supply cannot be increased with a rise in price due to a shortage of resources.
Key Takeaways
Key Takeaways
- The law of supply states a direct relationship between price and quantity supplied, other things being equal. ⭐
- Its five assumptions keep other goods' prices, technology, factor prices, taxation policy and producer goals constant (ceteris paribus). ⭐
- The law is qualitative, non-proportional and one-sided. ⭐
- It operates because of the profit motive, the entry and exit of firms, and stock adjustments.
- Exceptions: future expectations, agricultural goods, perishable goods, rare articles and backward countries. ⭐