Law of supply

Definition

The law of supply is a fundamental principle in economics that describes the relationship between the price of a good or service and the quantity that producers are willing and able to sell in a given period.

What is law of supply?

Law of supply states that, assuming all other factors remain constant, when the price of a good or service rises, the quantity that producers are willing and able to supply also increases. Conversely, when the price falls, the quantity supplied decreases.

Producers aim to maximise their profits. When the price of a good rises, producers have an incentive to supply more of it to the market because they can earn higher revenues. Conversely, when the price falls, producers are less inclined to supply large quantities because they would earn lower revenues.

The relationship described by the law of supply is typically illustrated on a supply curve. The supply curve slopes upward from left to right, indicating that as price increases, the quantity supplied increases, and as price decreases, the quantity supplied decreases.

Changes in factors other than price can lead to shifts in the entire supply curve. For instance, changes in input costs, technology, or government regulations can alter the quantity supplied at all price levels. These are called shifts in supply. 

The law of supply is a universal economic principle applicable in markets around the world. It is a crucial concept for understanding producer behaviour and market dynamics in both domestic and international contexts.

Example of law of supply

Let’s illustrate the law of supply using the example of coffee beans. Coffee beans are currently priced at £5 per pound, and coffee farmers are willing to supply 10,000 pounds of coffee to the market.

Due to factors like increased global demand or a shortage in coffee production, the market price of coffee beans rises to £6 per pound. In response to the higher price, coffee farmers find it more profitable to supply coffee beans. As a result, the quantity supplied increases to 12,000 pounds.

If the market price continues to rise, reaching £7 per pound, coffee farmers are even more motivated to supply coffee beans. The higher price incentivises coffee farmers to increase their production and supply. Now, at the £7 price point, they are willing to supply 14,000 pounds of coffee to the market.

In this example, the law of supply is demonstrated as an increase in the price of coffee beans leads to an increase in the quantity supplied. Conversely, if the market price were to decrease, say to £4 per pound, farmers might find it less economically viable to produce and supply coffee