What Is the Law of Supply?
The law of supply is a microeconomic law. It states that, all other factors being equal, as the price of a good or service increases, the quantity of that good or service that suppliers offer will increase, and vice versa.
In plain terms, this law means that as the price of an item goes up, suppliers will attempt to maximize their profits by increasing the number of that item that they sell.
Key Takeaways
- The law of supply says that a higher price will lead producers to supply a higher quantity to the market.
- Because businesses seek to increase revenue, when they expect to receive a higher price for something, they will produce more of it.
- Meanwhile, if prices fall, suppliers are disincentivized from producing as much.
- Supply in a market can be depicted as an upward-sloping supply curve that shows how the quantity supplied will respond to various prices over a period of time.
- Together with demand, the law of supply forms half of the law of supply and demand.
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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.
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The supply curve slopes upward 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 to devote 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.
British economist Alfred Marshall (1842–1924), a specialist in microeconomics, contributed significantly to supply theory, especially in his pioneering use of the supply curve. He emphasized that the price and output of a good are determined by bothsupplyand demand; the two curves are like scissor blades that intersect at equilibrium.
Examples of the Law of Supply
The law of supply summarizes the effect that 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.
To further illustrate this concept, consider how gas prices work. When the price of gasoline rises, it encourages profit-seeking firms to take actions to expand supply, such as:
- Increase exploration for oil reserves
- Drill for more oil
- Invest in more pipelines and tankers to bring the oil to plants where it can be refined into gasoline
- Build new oil refineries
- Purchase additional pipelines and trucks to ship the gasoline to gas stations
- Open more gas stations
- Keep existing gas stations open longer hours
The law of supply is so intuitive that you may not even be aware of all the examples around you. For example, when college students learn that computer engineering jobs pay more than English professor jobs, the supply of students with majors in computer engineering increases. If consumers start paying more for cupcakes than for doughnuts, bakeries will increase their output of cupcakes and reduce their output of doughnuts to increase their profits.
The law of supply can even impact your own employment. When your employer pays time and a half for overtime, the number of hours you are willing to supply for work might increase.
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 curves and market supply curves. Individual supply curves graph the individual supply schedule, while market supply curves represent the market supply schedule.
What Factors Affect Supply?
Supply is influenced by prices and consumer demand. The number of suppliers available, the level of competition, the state of technology, and the presence of government support or restriction will play important roles. For certain products like agricultural commodities, supply is also impacted by factors such as weather and crop yields.
What Is the Law of Demand?
The law of demand is a fundamental principle of economics that states that at a higher price, consumers will demand a lower quantity of a good, and vice versa.
What Is Supply and Demand?
The law of supply and demand outlines the interaction between a buyer and a seller of a resource. Supply and demand law says that sellers will supply less of a product or resource as price decreases, while buyers will buy more, and vice versa, until an equilibrium price and quantity are reached. It incorporates both the law of supply and the law of demand.
The Bottom Line
The law of supply states that a higher price for a good or service will lead producers to supply more of that good or service to the market. This is because businesses want to increase their profits. When they can get a higher price for something, they will produce more of it than they will of other, lower-priced goods and services.
On the other hand, if prices fall, suppliers won’t produce as much. The law of supply is one part of the law of supply and demand.
