The Law of Supply is the Economic Law that determines the quantity offered by the producers of a good in dependence of its price and other influential factors. The supply represents the quantities that the producers of a good are willing to offer to different alternative prices.
Factors that determine demand
- The price of the good: increasing the price of the good will increase the amount offered and vice versa.
- Costs of production: If the costs increase, the supply decreases and vice versa.By increasing the price of the inputs of a good, its supply will decrease and vice versa. When talking about the price of resources and inputs, it refers to labor prices (wages), commodity prices, energy prices, interest rates, etc.
- Production technology: by improving technology in production, the supply of a good will increase.
- Expected future prices: If the price of the produced good is expected to increase in the short term, supply will increase, and vice versa.
- Number of bidders: With a greater number of bidders the offer of a good will increase and vice versa.
- Taxes and subsidies: When taxes are imposed, supply is reduced and when subsidies are applied, supply increases.
Law of Supply
Economic law that determines that the offered quantity of a good increases as its price does, keeping the remaining variables constant. The quantity offered is directly proportional to the price.
The increase in the price (P) causes an increase in the quantity offered (Qs) and a decrease in the price causes a reduction of the quantity offered.
More from Business Study Notes:- Law of Demand
The supply law reflects the relationship between the demand for a good in the market and the quantity of the same that is offered based on the price that is established.
In particular, it determines the quantity of a particular good or service that is offered by the producers taking into account its price. Usually the relationship between this quantity and the price variable will be direct or positive, contrary to the Law.
By definition, as the concept of supply is developed, in the face of an increase in price, the quantity supplied increases. Likewise, in the opposite case, where the directly proportional relationship is maintained, and in the event of a reduction in price, a decrease in quantity will occur simultaneously.
This is because producers demand at least a certain price to offer a certain quantity of goods. The more prices there are and the more compensation you receive, the more obviously a quantity of product will be willing to offer. In other words, you will find greater incentives to offer your products or services in the market.
For the producer of a good, the amount that it offers depends on the selling price. In the same way, it will also be influenced by production costs, which in themselves depend on the technology, labor costs and other costs of the production process.
Law of Supply Example
As an example, we assume a producer of wood that produces tables, for a certain technological level, the amount offered will depend on the selling price, the wages of the workers or the price of the wood. To simplify, we ignore the price of other factors like glue, screws, etc.
The demand curve is the graphical representation of the relationship between quantity supplied and prices. It is a curve that shows the quantities of a good that a seller is willing to sell at different levels of alternative prices, assuming that all other determinants remain constant.
It has a positive slope, due to the direct relationship between prices and quantities offered
Movements in the supply curve
Movements along the supply curve (variation of quantity offered) are caused by changes in the price of the given good. When prices are high, the quantities offered are high and if prices decrease, the quantity offered decreases.
Shifts in the supply curve
Shifts in the supply curve (changes in supply) are due to changes in the other factors that determine supply, except for the price of the product itself, that is, changes in the cost of production, business taxes, the expected price or quantity, the change in the price of other goods produced, the change in the number of sellers, etc.