When we look at the question stated above we must first study what the usual relationship is between Supply and Price, then why this is so and then we will look at some exceptions for the law of supply. Supply can be defined as follows; ‘The quantity of a product that a business will offer at a given price’

The usual relationship between Supply and Price

The graph above clearly shows the usual relationship between supply and price. If the price goes up, more of an item will be produced. In a table you would see that at an increase of one unit in price the quantity supplied would increase by +- 18. This is called an extension of supply. To do the same thing but then looking at the difference in supply when lowering the price is called contraction of supply.

Perfectly elastic supply & perfectly inelastic supply

Perfectly elastic supply and perfectly inelastic supply are the two extremes when you are looking at the law of supply. Perfectly elastic supply means that the price is fixed and that supply is infinite at that price only. At other prices there is no supply. This means that the price elasticity of supply = &

• Indirect taxes and subsidies; if indirect taxes are lowered, supply will rise. The producer will be able to keep a certain percentage of the price of the goods which he used to give to the government; therefore he will be able to produce a larger amount for the same price. If subsidies are raised, it means the producer is rewarded more for their production causing production to increase

• Changes in prices of F.O.P.; if, for example, the price of raw goods would decrease the producers the producer will again be able to produce more goods while price stays the same

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