Reading: Law of Supply

Breaking Down “Law of Supply”

The law of supply is a fundamental principle of economic theory which states that, all else equal, an increase in price results in an increase in quantity supplied. In other words, there is a direct relationship between price and quantity: quantities respond in the same direction as price changes.

The chart below depicts the law of supply using a supply curve, which is always 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.

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

When college students learn computer engineering jobs pay more than English professor jobs, the supply of students with majors in computer engineering will increase.

When consumers start paying more for cupcakes than for donuts, bakeries will increase their output of cupcakes and reduce their output of donuts in order to increase their profits.

When your employer pays time and a half for overtime, the number of hours you are willing to supply for work increases.

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 1,000,000 systems if the price is $200 each, but if the price increases to $300, they might supply 1,500,000 systems.

Supply Schedule shows the relationship between price and quantity supplied with all else equal.

Grapes Supply Schedule:

Scenario  Price (per lbs)  Quantity Supplied
A  1.00  1000 lbs
B  2.00  2000 lbs
C  3.00  2500 lbs
D  4.00  2750 lbs

Based off this supply schedule we can draw a supply curve