Law Of Supply

AAA

DEFINITION of 'Law Of Supply'

A microeconomic law that states, all other factors being equal, as the price of a good or service increases, the quantity of goods or services that suppliers offer will increase, and vice versa. The law of supply says that as the price of an item goes up, suppliers will attempt to maximize their profits by increasing the quantity offered for sale.

INVESTOPEDIA EXPLAINS 'Law Of Supply'

The chart below depicts the law of supply using a supply curve, which is always upward sloping. A, B and C are points on the supply curve. Each point on the curve reflects a direct correlation between quantity supplied (Q) and price (P). So, at point A, the quantity supplied will be Q1 and the price will be P1, and so on.
 

 

Law Of Supply

The law of supply is so intuitive that you may not even be aware of all the examples around you.

-When college students learn computer engineering jobs pay more than English professor jobs, the supply of students with majors in computer engineering will increase.

-When consumers start paying more for cupcakes than for donuts, bakeries will increase their output of cupcakes and reduce their output of donuts in order to increase their profits.

-When your employer pays time and a half for overtime, the number of hours you are willing to supply for work increases.

The law of supply summarizes the effect price changes have on producer behavior. For example, a business will make more video game systems if the price of those systems increases. The opposite is true if the price of video game systems decreases. The company might supply 1,000,000 systems if the price is $200 each, but if the price increases to $300, they might supply 1,500,000 systems.

The law of supply is one of the most fundamental concepts in economics. It works with the law of demand to explain how market economies allocate resources and determine the prices of goods and services.

 

VIDEO

Loading the player...
RELATED TERMS
  1. Law Of Demand

    A microeconomic law that states that, all other factors being ...
  2. Economies Of Scale

    The cost advantage that arises with increased output of a product. ...
  3. Walras' Law

    An economics law that suggests that the existence of excess supply ...
  4. Say's Law Of Markets

    An economic rule that says that production is the source of demand. ...
  5. Theory Of Price

    An economic theory that contends that the price for any specific ...
  6. Equilibrium

    The state in which market supply and demand balance each other ...
RELATED FAQS
  1. Does the law of diminishing marginal returns only apply to labor?

    The law of diminishing returns is used by economists to describe a phenomenon occurring whenever additional production capacity ... Read Full Answer >>
  2. Is there any way to reverse the law of diminishing marginal returns?

    As production capacity continues to increase, a point comes when further increases in capacity no longer provide significant ... Read Full Answer >>
  3. How does price elasticity affect supply?

    There are two types of price elasticity: price elasticity of supply and price elasticity of demand. The price elasticity ... Read Full Answer >>
  4. What is the difference between ceteris paribus and mutatis mutandis?

    Ceteris paribus and mutatis mutandis are Latin phrases commonly used as shorthand to explain certain ideas in economics and ... Read Full Answer >>
  5. What's the difference between microeconomics and macroeconomics?

    Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and ... Read Full Answer >>
  6. Is there an easy way to calculate the law of supply and demand for small business?

    Small businesses use the law of supply and demand the same way large corporations do. Supply refers to the amount of a product ... Read Full Answer >>
  7. What economic indicators are most used when forecasting an exchange rate?

    The economic indicators used to forecast an exchange rate are the same ones used to determine the overall economic health ... Read Full Answer >>
  8. Why is time an important factor when evaluating supply?

    According to the microeconomics Law of Supply, suppliers will produce a greater amount of a good as demand increases for ... Read Full Answer >>
  9. How do companies balance labor supply and demand in human resources planning?

    Companies can use strategic human resource (HT) planning to forecast current and future staffing needs using a variety of ... Read Full Answer >>
  10. What types of consumer goods demonstrate the price elasticity of supply?

    In economics, the price elasticity of supply describes how sensitive the supply of a good is to a change in its price. Goods ... Read Full Answer >>
  11. Which of the following are tools that are employed by the Federal Reserve in its ...

    I. Moral suasionII. Changing the discount rateIII. Changing the reserve requirementIV. Changing the prime interest rate A. ... Read Full Answer >>
Related Articles
  1. Economics

    Law of Supply

    The law of supply is one of the most fundamental principles in microeconomics. According to the law of supply, for all other things remaining constant, the higher the price of a good or service, ...
  2. Economics

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  3. Fundamental Analysis

    Where's The Market Headed Now?

    Whether up, down or sideways, learn about some of the factors that drive stock market moves.
  4. Economics

    Introduction To Supply And Demand

    Find out all about supply and demand and how it relates to your daily purchases.
  5. Economics

    Understanding Supply-Side Economics

    Does the amount of goods and services produced set the pace for economic growth? Here are the arguments.
  6. Personal Finance

    Why U.S. Home Prices Rely On Supply And Demand

    Look for factors that influence supply and demand and you might be able to predict which way housing prices will trend.
  7. Active Trading

    What Determines Oil Prices?

    Changes in the price of oil aren't arbitrary. Read on to find out what moves them and why.
  8. Active Trading

    Why You Can't Influence Gas Prices

    Don't believe the water-cooler talk. Big oil companies aren't to blame for high prices.
  9. Economics

    What Determines Gas Prices?

    Gas prices are influenced by more than supply and demand. Find out what determines the price you pay at the pump.
  10. Economics

    Why Prices Never Really Go Down

    If deflation and inflation are opposite polls of monetary policy, how come we put up with one but fear the other?

You May Also Like

Hot Definitions
  1. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  2. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  3. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  4. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  5. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  6. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!