Law of Supply

According to the law of supply, a microeconomic law, there is a direct relationship between supply and the price of a product or service assuming ceteris paribus (i.e. other things being constant). Law of supply states that the quantity of a product or resource made available for sale by a producer or a resource owner varies directly with the price of the product or resource respectively provided that other things remain constant.

It is important to note that supply is affected by a number factors in addition to price and the law of supply applies only under the assumption that these other factors remain constant. The factors affecting supply are called determinants of supply.

Examples

There are numerous examples of economic behavior which are in conformance to the law of supply. For example:

  • fruit vendors will try to make available more fruits for sale when the fruit prices are high and relatively less when the prices are low
  • tailors will try to sew more clothes per period if sewing charges increase
  • banks will offer more loans if interest rates rise
  • oil producing countries will supply more oil if price per barrel increase and will limit the supply if price per barrel drops

The law of supply is often presented in the form of a supply curve which shows the relationship between the price and the quantity supplies of a product as shown below:

Supply Curve Graph

The above supply line has a positive slope thus indicating that there is direct relationship between the price of a product and the quantity supplied. As the price increases, producers and resource owners will supply more.

by Irfanullah Jan, ACCA and last modified on

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