Law Of Supply

What is the Law of Supply?

The law of supply is the microeconomic law that states that, all other factors being equal, as the price of a good or service increases, the quantity of goods or services that suppliers offer will increase, and vice versa. The law of supply says that as the price of an item goes up, suppliers will attempt to maximize their profits by increasing the quantity offered for sale.

Understanding the Law Of Supply

The chart below depicts the law of supply using a supply curve, which is upward sloping. A, B, and C are points on the supply curve. Each point on the curve reflects a direct correlation between quantity supplied (Q) and price (P). So, at point A, the quantity supplied will be Q1 and the price will be P1, and so on.

 Image by Julie Bang © Investopedia 2019

The supply curve is upward sloping because, over time, suppliers can choose how much of their goods to produce and later bring to market. At any given point in time however, the supply that sellers bring to market is fixed, and sellers simply face a decision to either sell or withhold their stock from a sale; consumer demand sets the price and sellers can only charge what the market will bear.

If consumer demand rises over time, the price will rise, and suppliers can choose devoted new resources to production (or new suppliers can enter the market) which increases the quantity supplied. Demand ultimately sets the price in a competitive market, supplier response to the price they can expect to receive sets the quantity supplied.  

The law of supply is one of the most fundamental concepts in economics. It works with the law of demand to explain how market economies allocate resources and determine the prices of goods and services.

Examples of the Law of Supply

The law of supply summarizes the effect price changes have on producer behavior. For example, a business will make more video game systems if the price of those systems increases. The opposite is true if the price of video game systems decreases. The company might supply 1 million systems if the price is $200 each, but if the price increases to $300, they might supply 1.5 million systems.

The law of supply is so intuitive that you may not even be aware of all the examples around you:

What is the best example of the law of supply?

The law of supply summarizes the effect price changes have on a producers behavior. For example, a business will make more of a good (such as TVs or cars) if the price of that product increases.

What is the law of demand and supply?

Law of demand and supply outlines the interaction between a buyer and a seller of a resource. The law of demand and supply says that sellers will supply less of a product or resource as price decreases, while buyers will buy more, and vice versa.

What are the types of law of supply?

There are five types of supply — market supply, short-term supply, long-term supply, joint supply, and composite supply. Meanwhile, there are two types of supply curves, individual supply cure and market supply curve. Individual supply curve graphs the individual supply schedule, while market supply curve represents the market supply schedule.