Exception to Law of Supply

We know that the law of supply states that other factors kept constant as the price increases, the quantity supplied of a commodity increases and vice versa. What if there is decrease in quantity supplied with rise in price and vice versa? Such situations are called as exceptions to the law of supply simply because they do not follow this law.  Following are the exceptions to the law of supply:

Expectations regarding future prices: When the sellers expect the prices to rise in the future then they may adopt wait and watch policy and withhold their supply of goods. Even though the price may be higher the sellers may want to supply the goods when the prices rise even more which would fetch them good returns. Also if the sellers expect the prices to fall in the coming days then they may sell off their goods at existing lower prices in order to avoid losses.

Farm produce: In case of farm products it is nothing but a play of climate.  Such products may not obey the law of supply as they may not react to changes in prices due to heavy dependency on weather conditions.

Perishable commodities: The commodities fall in different classes and not all of them can be stored for a longer period of time. Certain commodities have very short shelf life and they need to be made available in the market before they perish. The common examples of perishable goods are fruits, sea produce, flowers, meat, vegetables and so on. So for such goods the sellers cannot simply wait for a longer time and supply these in the market even when the prices are not rising.

Out of fashion goods: When goods are in fashion then the sellers can command a high price. But there are certain goods that go out of fashion and are no longer in vogue. Such goods are supplied by the sellers at low prices in order to clear these goods.

Economic Slowdown: The businesses pass through different phases and the sellers have to adapt to these changes. During the low economic phases the sellers may not have advantage of high prices and hence during such tough times goods are sold even when they do not witness price rise in order to recover their costs. So the law of supply is not applicable in this case.

Change in business: It may happen that the seller may plan to enter into an entirely new area of business by exiting the current one. So when the present business is on the verge of closure then the seller may sell the goods at lower prices simply to clear them off. So here too the law of supply is not followed.

Immediate requirement of funds: The seller may face a time when he is in immediate need of funds. At such situation he may supply the goods in the market even at lower prices.

Supply of labour: Another fine example of the exception to the law of supply is the labour supply. The workers are interested in high wages till a certain point. Once that point is achieved they may like to devote their time to leisure activities. So after a particular point the workers may no longer be interested in higher wages.  This simply means that initially the supply of labour is directly related to the wages but after a certain level the relation between wages and supply of labour turns inversely related. The supply curve in such a situation will be ‘backward sloping’ SS1 as illustrated in figure, At WN wage rate, the supply of labor is ON. But beyond NW wage rate the worker will reduce rather than increase his working hours. At MW1 wage rate the supply of labor is reduced to OM.

Extension and Contraction of Supply: Extension and Contraction of supply refer to movements on the same supply curve. If with a rise in price, the supply rises, it is called an extension of supply; if, with a fall in price, the supply declines it is called a contraction of supply. The ‘extension’ and ‘contraction’ of supply are illustrated in figure, the movement from point E to E1 on the same supply curve shows an extension of supply and E1 to E shows a contraction of supply. Supply is said to increase when more is offered in the market without a change in price. Supply is said to decrease when less is offered in the market without a change in the price of the commodity. In figure 5, at price EM, the supply is OM. SS is the supply curve before the change. S1S1 shows an increase in supply because at the same price ME = M1E1 more is offered for sale, i.e., OM1 instead of OM. S2S2 shows the decrease in supply because at the same price ME = M2E2 less is offered for sale, i.e., OM2 instead of OM.