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When you were reading about the law of demand, you were asked to imagine how people might respond if the price of a laptop fell from $950 to $650. The answer is logical – we would buy more of them. But would the extra computers that we want to buy be available for sale?

Imagine now that you are the owner of a firm that sells laptop computers. For some reason the market has changed, and you are now only able to receive $650 for each computer that you sell. How would you react? This is slightly more complicated, and so let's consider a few more variables.

What if the laptop computers cost you $700 each? If that was the case, you might say that you don’t want to sell any computers – each time you sell one you will be losing $50! On the other hand, what if the computers cost you $500? In this case, your margin (the profit that you make on each sale) has fallen from $450 for each machine to only $150. If you are able to sell other items that will gain you a better return, you might choose to invest your money in different stock lines.

Our conclusion is this: As the selling price of an item falls, we will probably choose not to sell as many of those items in the future. We make this decision because we are probably able to earn a better return on a different item.

From this, we can say that the law of supply is best explained as follows: As the selling price of an item falls, the quantity of those items that we will offer for sale will also fall. Once again, we can represent this on a graph.

You can see that this graph looks very different from the one which we developed for the law of demand. In this case, at point A the price is low, and the quantity being supplied is low. As we move to point B, the price has increased, and the quantity that we are willing to sell has also increased.

Many students progress through their entire study without ever coming to terms with the law of supply. You should take the time to really understand the information on this page before you move on.

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