Explain four assumptions implied in the law of supply. (8 marks)November 2022

The law of supply states that, all other things being equal, as the price of a good or service increases, the quantity supplied will also increase. The following are some of the assumptions implied in the law of supply:

1. Constant technology: The law of supply assumes that the technology used to produce a good or service remains constant. If technology changes, it could affect the cost of production, which in turn could affect the quantity supplied.
2. Rational producers: The law of supply assumes that producers are rational and will respond to changes in price in a logical manner. If producers are not rational, they may not respond to changes in price in the way that the law of supply predicts.
3. Perfect competition: The law of supply assumes that the market is perfectly competitive, meaning that there are many buyers and sellers in the market and no one buyer or seller has significant market power.
4. No external factors: The law of supply assumes that there are no external factors that could affect the quantity supplied. For example, if a natural disaster destroys a key production facility, it could affect the quantity supplied of a good or service.
5. No change in production cost: The law of supply assumes that the cost of production remains constant. If the cost of production changes, it could affect the quantity supplied.
6. No change in government policies: The law of supply assumes that there is no change in government policies that could affect the quantity supplied, such as taxes, subsidies, or regulations.