The Law of Supply

Definition

The law of supply states that as the price of a product increases the quantity of that item that will be supplied will also increase. At first this may seem unusual, but that is because we are all accustomed to thinking as consumers.

Imagine that you are a business owner. It costs you $1.50 to buy a particular pencil case, and you are able to sell it for $3.00. At that price, you will certainly be willing to purchase and try to sell some pencil cases. Now imagine that for some reason the selling price of a pencil case increases. They still cost you $1.50 to buy, but you are now able to sell them for $6.00. At this new price you are making a much higher profit! Therefore, it is likely that you will choose to stock even more pencil cases, to try and maximise your profit (and hopefully as a result increase your standard of living).

This is the basis for the law of supply. Business owners will work to maximise their profits, and as such if the selling price of an item increases they will allocate more of their resources into the production and sale of that item, and the quantity supplied will increase. We can represent this on a graph like this:

We can see from this graph that when the price was low, suppliers were only willing to provide us with a small quantity (point A). On the other hand, as the price increased so did the quantity that the businesses were willing to supply, until eventually we made it all the way to point B.

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