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COMMODITY EXCHANGE: A financial market that trades the ownership of various commodities, such as wheat, corn, cotton, sugar, crude oil, natural gas, gold, silver, and aluminum. The two biggest commodity exchanges in good old U. S. of A. are the Chicago Board of Trade and the Chicago Mercantile Exchange. Unlike, let's say a grocery store where commodities physically trade hands, commodity exchanges trade only legal ownership. This is much like a stock market, which trades the ownership of a corporation, but leaves the factory at home. Commodity markets offer two basic sorts of trading -- spot (immediate delivery of a commodity) and futures (delivery of a commodity at a future date).

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LAW OF SUPPLY:

The direct relationship between supply price and the quantity supplied, assuming ceteris paribus factors are held constant. This economic principle indicates that an increase in the price of a commodity results in an increase in the quantity of the commodity that sellers are willing and able to sell in a given period of time, if other factors are held constant. The law of supply is an important principle in the study of economics.
The law of supply is the scientific relation between supply price and quantity supply that captures the supply side of the market. When combined with the law of demand the result is the market model. The market provides a powerful tool for analyzing exchanges, resource allocation, and efficiency.

What Does It Mean?

The direct relation of this law means that sellers who have ownership and control over resources are willing and able to sell more of a good if the price is higher and less of a good if the price is lower. From a scientific method perspective, this indicates that price causes quantity supplied. Or more specifically that a change in the supply price causes a change in the quantity supplied.

Working the Curve

Supply Curve
The law of supply is conveniently illustrated by a supply curve. In particular, it is illustrated by the positive slope of a supply curve, such as the one presented to the right. The positive slope of the supply curve means that higher prices are related to larger quantities and that lower prices are related to smaller quantities. Price goes up, quantity goes up. Price goes down, quantity goes down.

Looking Into Production

Insight into the law of supply is provided by the analysis of production possibilities and short-run production. The direct relation between supply price and quantity supplied can be tentatively explained through basic economic principles associated with each analysis.
  • Law of Increasing Opportunity Cost: This law states that as the production of one good is increased, moving along the production possibilities curve, then the opportunity cost (in terms of foregone production of the other good) increases. If sellers incur greater opportunity cost, then they need to receive a higher price, which generates the law of supply.

  • Law of Diminishing Marginal Returns: The law states that as the production of a good is increased, by the addition of a variable input to a fixed input, then the marginal product of the variable input declines. With this decline, more of the variable input is needed, which increases the cost of production. If sellers incur greater production cost, then they need to receive a higher price, which also generates the law of supply.

Many Exceptions

While the law of supply generally reflects what happens on the supply side of market, it is not a universal principle that applies to all markets under all circumstances. There are, in fact, numerous important exceptions to the law of supply. In particular, if the supply side of the market is controlled by small number of sellers (including a single seller), then the law of supply might not operate.

For example, monopoly, which is a market with a single seller, is not necessarily inclined to offer a larger quantity supplied even though the price is higher. Market control by the monopoly allows it to set the market price based on demand conditions, without cost constraints imposed from the supply side. Other market structures, including oligopoly and monopolistic competition, might have more competition, but market control can also negate the law of supply.

<= LAW OF INCREASING OPPORTUNITY COSTLEADING ECONOMIC INDICATORS =>


Recommended Citation:

LAW OF SUPPLY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: October 1, 2014].


Check Out These Related Terms...

     | supply schedule | supply curve | supply space | supply determinants | producer surplus | change in supply | change in quantity supplied | law of demand |


Or For A Little Background...

     | supply | supply price | quantity supplied | market | quantity | price | limited resources | economic analysis | exchange | scarcity | good | service | production | opportunity cost | ceteris paribus |


And For Further Study...

     | market supply | competition | value | production possibilities | competitive market | efficiency | exchange | law of increasing opportunity cost | law of diminishing marginal returns | marginal product | marginal cost | short-run production analysis |


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