Law of supply

The law of supply is a fundamental principle of economic theory which states that, keeping other factors constant, an increase in price results in an increase in quantity supplied.[1] In other words, there is a direct relationship between price and quantity: quantities respond in the same direction as price changes. This means that producers are willing to offer more of a product for sale on the market at higher prices by increasing production as a way of increasing profits.[2]

In short, the law of supply is a positive relationship between quantity supplied and price and is the reason for the upward slope of the supply curve.

Some heterodox economists, such as Steve Keen and Dirk Ehnts, dispute the law of supply, arguing that the supply curve for mass produced goods is often downward-sloping: as production increases, unit prices go down, and conversely, if demand is very low, unit prices go up.[3][4]

Definition

A supply is a good or service that producers are willing to provide. The law of supply determines the quantity of supply at a given price,[5] or, equivalently, the microeconomic law explaining the characteristic of the supply, which 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 number of items for sale."[6][7]

For example, a job paying £20\hr attracts more interest than a job paying £15\hr.

The law of supply and demand then states that, at a given price, if the quantity of a product demanded exceeds the quantity of a product supplied, then the price increases, which decreases the demand (law of demand) and increases the supply (law of supply), and vice versa, until the quantity demanded equals the quantity supplied.

Affecting factors

There are various non-price determinants that can cause a shift in a supply curve.[8] An increase in supply causes the supply curve to shift to the right (the same price buys more goods).

  • Cost of production - if the costs of production, such as wages, decrease, then the firms can produce more at the same price, so the quantity supplied will increase.
  • Numbers of suppliers - if the number of suppliers of a product increases, the quantity supplied increases.
  • Capacity - if the capacity of a factory producing the goods increases, the quantity supplied will increase.
  • Weather - for example, in agriculture the quantity supplied is dependent on the weather.
  • Government policy - government subsidies to encourage certain products decrease overall cost of production. Additionally, government taxation can cause the cost of production to rise.

See also

References
  1. Mas-Colell, A., Whinston, M. Green, J.: Principles of Microeconomics. Oxford University Press., pg 138. 1995.
  2. Rittenberg, L. & Tregarthen, T.: Microeconomics
  3. Ehnts, Dirk (April 29, 2019). "The problem with the supply curve". econoblog101. Retrieved October 18, 2022.
  4. Keen, Steve (2011). "Chapter 5: The price of everything and the value of nothing". Debunking Economics: The Naked Emperor Dethroned?. Zed Books. ISBN 978-1848139923.
  5. Kenton, W. (2021). https://www.investopedia.com/terms/s/supply.asp
  6. What Is the Law of Supply?. https://www.investopedia.com/terms/l/lawofsupply.asp
  7. What is Law Of Supply? Definition of Law Of Supply, The Economic Times. https://economictimes.indiatimes.com/definition/law-of-supply
  8. Pettinger, T. (2019). Factors affecting Supply - Economics Help. https://www.economicshelp.org/microessays/equilibrium/supply/
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