Law Of Supply

What Does Law Of Supply Mean? A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity of goods or services offered by suppliers increases and vice versa.

Investopedia explains Law Of Supply As the price of a good increases, suppliers will attempt to maximize profits by increasing the quantity of the product sold. ENCARTA

The most basic laws in economics are the law of supply and the law of demand. Indeed, almost

every economic event or phenomenon is the product of the interaction of these two laws. The law of supply states that the quantity of a good supplied (i.e., the amount owners or producers offer for sale) rises as the market price rises, and falls as the price falls. Conversely, the law of demand (see DEMAND) says that the quantity of a good demanded falls as the price rises, and vice versa. (Economists do not really have a law of supply, though they talk and write as though they do.)
One function of markets is to find equilibrium prices that balance the supplies of and demands for goods and services. An equilibrium price (also known as a market-clearing price) is one at which each producer can sell all he wants to produce and each consumer can buy all he demands. Naturally, producers always would like to charge higher prices. But even if they have no competitors, they are limited by the law of demand: if producers insist on a higher price, consumers will buy fewer units. The law of supply puts a similar limit on consumers. They always would prefer to pay a lower price than the current one. But if they successfully insist on paying less (say, through PRICE CONTROLS), suppliers will produce less and some demand will go unsatisfied. Economists often talk of demand curves and supply curves. A demand curve traces the quantity of a good that consumers will buy at various prices. As the price rises, the number of units demanded declines. That is because everyones resources are finite; as the price of one good rises, consumers buy less of that and, sometimes, more of other goods that now are relatively cheaper. Similarly, a supply curve traces the quantity of a good that sellers will produce at various prices. As the price falls, so does the number of units supplied. Equilibrium is the point at which the demand and supply curves intersectthe single price at which the quantity demanded and the quantity supplied are the same. Markets in which prices can move freely are always in equilibrium or moving toward it. For example, if the market for a good is already in equilibrium and producers raise prices, consumers will buy fewer units than they did in equilibrium, and fewer units than producers have available for sale. In that case producers have two choices. They can reduce price until supply and demand return to the old equilibrium, or they can cut production until the quantity supplied falls to the lower number of units demanded at the higher price. But they cannot keep the price high and sell as many units as they did before. Why does the quantity supplied rise as the price rises and fall as the price falls? The reasons really are quite logical. First, consider the case of a company that makes a consumer product. Acting rationally, the company will buy the cheapest materials (not the lowest quality, but the lowest cost for any given level of quality). As production (supply) increases, the

company has to buy progressively more expensive (i.e., less efficient) materials or labor, and its costs increase. It charges a higher price to offset its rising unit costs. Are there any examples of supply curves for which a higher price does not lead to a higher quantity supplied? Economists believe that there is one main possible example, the so-called backward-bending supply curve of labor. Imagine a graph in which the wage rate is on the vertical axis and the quantity of labor supplied is on the horizontal axis. It makes sense that the higher the wage rate, the higher the quantity of labor supplied, because it makes sense that people will be willing to work more when they are paid more. But workers might reach a point at which a higher wage rate causes them to work less because the higher wage makes them wealthier and they use some of that wealth to buy more leisurethat is, to work less. Recent evidence suggests that even for labor, a higher wage leads to more hours worked.1 Or consider the case of a good whose supply is fixed, such as apartments in a condominium. If prospective buyers suddenly begin offering higher prices for apartments, more owners will be willing to sell and the supply of available apartments will rise. But if buyers offer lower prices, some owners will take their apartments off the market and the number of available units will drop. History has witnessed considerable controversy over the prices of goods whose supply is fixed in the short run. Critics of market prices have argued that rising prices for these types of goods serve no economic purpose because they cannot bring forth additional supply, and thus serve merely to enrich the owners of the goods at the expense of the rest of society. This has been the main argument for fixing prices, as the United States did with the price of domestic oil in the 1970s and as New York City has done with apartment rents since World War II (see RENT CONTROL). Economists call the portion of a price that does not influence the amount of a good in existence in the short run an economic quasi-rent. The vast majority of economists believe that economic rents do serve a useful purpose. Most important, they allocate goods to their highest-valued use. If price is not used to allocate goods among competing claimants, some other device becomes necessary, such as the rationing cards that the U.S. government used to allocate gasoline and other goods during World War II. Economists generally believe that fixing prices will actually reduce both the quantity and the quality of the good in question. In addition, economic rents serve as a signal to bring forth additional supplies in the future and as an incentive for other producers to devise substitutes for the good in question.
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Supply joins demand as one of the components of fundamental commodity market analysis. Supply characteristics relate to the behaviour of firms in producing and selling a product or service. An understanding of the factors affecting supply in the past will help with the development of supply expectations in the future and the impact upon market price. The law of supply can be approached from two different contexts. The first is that it represents the sum total of production plus carryover stocks. The other context for supply describes the behaviour of producers. The market or total supply represents the quantities producers are willing to sell over a range of prices for any given time period. At the individual level, you may be willing to produce a given product as long as the market price is equal to or greater than the cost of producing that product. The total supply is the sum of the individual quantities of product that each farmer brings to the market. Market supply is represented by an upward sloping curve with price on the vertical axis and quantity on the horizontal axis ( figure 2) An increase in price in most instances will result in farmers wanting to increase the quantity of a given product they will bring to the market, therefore the relationship between the price and supply is positive. Market supply will be affected by other variables in addition to the price. Factors that have been identified as important in determining supply behaviour include; the number of firms producing the product, technology, the price of inputs, the price of other commodities which could be produced, and the weather. With higher prices the producers of goods and services will receive greater profits. Greater profits will result in the means to expand production increasing the supply. This increased supply will ultimately satisfy the existing demand such that any additional production must be met with new demand in order for the price increases to be sustained. The firms which handle your grain or livestock products are not free to set prices as they choose. They can raise prices only if consumers are willing and able to pay more. The law of supply, as was the case with demand, illustrates the discipline of the marketplace. The market doesn't care what it costs you to produce something. Lower prices are the market's signal to farmers that they have produced too much of something or that it is something consumers do not want. To be a good marketer, you need to accept the "discipline of the marketplace". A good marketer learns to produce for the market.

The Supply Curve

The relationship between the quantity sellers want to sell during some time period (quantity supplied) and price is what economists call the supply curve. Though usually the relationship is positive, so that when price increases so does quantity supplied, there are exceptions. Hence there is no law of supply that parallels the law of demand. The supply curve can be expressed mathematically in functional form as Qs = f(price, other factors held constant). It can also be illustrated in the form of a table or a graph. A Supply Curve
Price of Widgets $1.00 $2.00 $3.00 $4.00 Number of Widgets Sellers Want to Sell 10 40 70 140

The graph shown below has a positive slope, which is the slope one normally expects from a supply curve.

If one of the factors that is held constant changes, the relationship between price and quantity, (supply) will change. If the price of an input falls, for example, the supply relationship may change, as in the following table. A Supply Curve Can Shift
Price of Widgets $1.00 $2.00 $3.00 $4.00 Number of Widgets Sellers Want to Sell [10] becomes 20 [40] becomes 60 [70] becomes 100 [140] becomes 180

The same changes can be shown with a graph that shows the supply curve shifting to the right. Notice each price has a larger quantity associated with it.

What Supply Is: Economists have a very precise definition of supply. Economists describe supply as the relationship between the quantity of a good or service consumers will offer for sale and the price charged for that good. More precisely and formally supply can be thought of as "the total quantity of a good or service that is available for purchase at a given price." What Supply Is Not: Supply is not simply the number of an item a shopkeeper has on the shelf, such as '5 oranges' or '17 pairs of boots', because supply represents the entire relationship between the quantity available for sale and all possible prices charged for that good. The specific quantity desired to sell of a good at a given price is known as the quantity supplied. Typically a time period is also given when describing quantity supplied. Supply - Examples of Quantity Supplied: When the price of an orange is 65 cents the quantity supplied is 300 oranges a week. If the price of copper falls from $1.75/lb to $1.65/lb, the quantity supplied by a mining company will fall from 45 tons a day to 42 tons a day. Supply Schedules: A supply schedule is a table which lists the possible prices for a good and service and the associated quantity supplied. The supply schedule for oranges could look (in part) as follows: 75 cents - 470 oranges a week 70 cents - 400 oranges a week 65 cents - 320 oranges a week 60 cents - 200 oranges a week

Supply Curves: A supply curve is simply a supply schedule presented in graphical form. The standard presentation of a supply curve has price given on the Y-axis and quantity supplied on the Xaxis. The Law of Supply: The law of supply states that, ceteribus paribus (latin for 'assuming all else is held constant'), the quantity supplied for a good rises as the price rises. In other words, the quantity demanded and price are positively related. Supply curves are drawn as 'upward sloping' due to this positive relationship between price and quantity supplied. Note: There are theoretical instances where the law of supply might not hold, though these are rarely, if ever, seen in the real world. Price Elasticity of Supply: The price elasticity of supply represents how sensitive quantity supplied is to changes in price. Further information is given in the article Price Elasticity of Supply.

Supply and Demand

A market is defined as a group of buyers and sellers of a particular product or service. Competitive markets are markets with many buyers and sellers, so that each has a very small influence on the price. Supply and demand is the most useful model for a competitive market, and shows how buyers (citizens) and sellers (businesses) interact in that market. Quantity Demanded & Supplied The demand for a product is the amount that buyers are willing and able to purchase. Quantity demanded is the demand at a particular price, and is represented as the demand curve. The supply of a product is the amount that producers are willing and able to bring to the market for sale. Quantity supplied is the amount offered for sale at a particular price. The main determinant of supply/demand is the price of the product. Law of Demand The Law of Demand states that other things held constant, as the price of a good increases, the quantity demanded will fall. Other factors that can influence demand include: 1. Income - Generally, as income increases, we are able to buy more of most goods. When demand for a good increases when incomes increase, we call that good a "normal good". When demand for a good decreases when incomes increase, then that good is called an inferior good. 2. Price of related products - Related goods come in two types, the first of which are "substitutes".Substitutes are similar products that can be used as alternatives. Examples of substitute goods are Coke/Pepsi, and butter/margarine. Usually, people substitute away to the less expensive good. Other related products are classified as "complements". Complements are products that are used in conjunction with each other. Examples of complements are pencil/eraser, left/right shoes, and coffee/sugar. 3. Tastes and preferences - Tastes are a major determinant of the demand for products, but usually does not change much in the short run. 4. Expectations - When you expect the price of a good to go up in the future, you tend to increase your demand today. This is another example of the rule of substitution, since you are substituting away from the expected relatively more expensive future consumption.

Demand Curves and Schedules Demand curves isolate the relationship between quantity demanded and the price of the product, while holding all other influences constant (in latin: ceteris paribus). These curves show how many of a product will be purchased at different prices. Note that demand is represented by the entire curve, not just one point on the curve, and represents all the possible price-quantity choices given the ceteris paribus assumptions. When the price of the product changes, quantity demanded changes, but demand does not change. Price changes involve a movement along the existing demand curve. Market demand is the summation of all the individual demand curves of those in the market. It is the horizontal sum of individual curves and add up all the quantities demanded at each price. The main interest is in market demand curves, because they are averages of individual behaviour tend to be well-behaved. When any influence other than the price of the product changes, such as income or tastes, demand changes, and the entire demand curve will shift (either upward or downward). A shift to the right (and up) is called an increase in demand, while a shift to the left (and down) is called a decrease in demand. In example, there are two ways to discourage smoking: raise the price through taxes or; make the taste less desirable. Law of Supply As the price of a product rises, ceteris paribus, suppliers will offer more for sale. This implies that price and quantity supplied are positively related. The major factor that influences supply is the "cost of production", and includes: 1. Input prices - As the prices of inputs such as labour, raw materials, and capital increase, production tends to be less profitable, and less will be produced. This leads to a decrease in supply. 2. Technology - Technology relates to methods of transforming inputs into outputs. Improvements in technology will reduce the costs of production and make sales more profitable so it tends to increase the supply. 3. Expectations - If firms expect prices to rise in the future, may try to product less now and more later. Supply Curves and Schedules The relationship between the price of a product and the quantity supplied, holding all other things constant is generally sloping upwards. Supply is represented by the entire curve and not just one point on the curve. When the price of the product changes, the quantity supplied changes, but supply does not change. When cost of production changes, supply changes, and the entire supply curve will shift. Market Supply is the summation of all the individual supply curves, and is the horizontal sum of individual supply curves. It is influenced by the factors that determine individual supply curves, such as cost of production, plus the number of suppliers in the market. In general, the more firms producing a product, the greater the market supply. When quantity supplied at a given price decreases, the whole curve shifts to the left as there is a decrease in supply. This is generally caused by an increase in the cost of production or decrease in the number of sellers. An increase in wages, cost of raw materials, cost of capital, ceteris paribus, will decrease supply. Sometimes weather may also affect supply, if the raw materials are perishable or unattainable due to transportation problems. Reaching Equilibrium We can analyze how markets behave by matching (or combining) the supply and demand curves. Equilibrium is defined as the intersection of supply and demand curves. The equilibrium price is the price where the quantity demanded matches the quantity supplied. The equilibrium quantity is the

quantity where price has adjusted so that QD = QS. At the equilibrium price, the quantity that buyers are willing to purchase exactly equals the quantity the producers are willing to sell. Actions of buyers and sellers naturally tend to move a market towards the equilibrium. Excess Supply/Demand Excess Supply is where Quantity supplied > Quantity demanded, and results in surpluses at the current price. A large surplus is known as a "glut". In cases of excess supply:

price is too high to be at equilibrium suppliers find that inventories increase suppliers react by lowering prices this continues until price falls to equilibrium

Excess Demand occurs when Quantity demanded > Quantity supplied, and results in shortages at current prices. In cases of excess demand:

buyers cannot buy all they want at the going price sellers find that their inventories are decreasing sellers can raise prices without losing sales prices increase until market reaches equilibrium

Law of Supply and Demand In free markets, surpluses and/or shortages tend to be temporary and obey the law of supply and demand, since actions of buyers and sellers tend to match prices back toward their equilibrium levels.

Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.

Equilibrium price A price at which the quantity of a good supplied is equal to the quantity demanded. If the supply curve is upward-sloping and the demand curve is downward-sloping, this price is unique.