Law Of Supply

Published Dec 31, 2022

Definition of Law of Supply

The law of supply states that, all other things equal, an increase in price leads to an increase in quantity supplied and vice versa. That means that as the price of a good or service increases, producers are willing to supply more of it. Similarly, as the price decreases, producers are willing to supply less of it.

Example

To illustrate this, let’s look at the example of a farmer who grows apples. Let’s assume that the farmer can produce up to 100 apples per month. Now, if the price of apples increases, the farmer will be willing to produce more apples because he can make more money by doing so. Thus, he might increase his production to 120 apples per month (or even more, depending on how much the price of apples increases).

On the other hand, if the price of apples decreases, the farmer will be less willing to produce as many apples, because he won’t make as much money by doing so. In other words, he won’t get as much money for all the hard work he puts in, so why bother? Thus, he might reduce his production to 80 apples per month or less, depending on how much the price actually decreases.

Why the Law of Supply Matters

The law of supply is a fundamental and extremely important concept in economics because it helps to explain how prices are determined in a market economy. It is also closely related to the law of demand, which states that all other things equal, an increase in price leads to a decrease in quantity demanded and vice versa. Together, these two laws explain how the interaction between buyers and sellers in a market determines the price of a good or service (see also law of supply and demand).