3.2: Law of Supply

The law of supply describes the relationship between the price of a good and the quantity supplied by producers. When the price of a product rises, the quantity supplied by producers increases, and when the price falls, the quantity supplied decreases. This principle operates under the ceteris paribus assumption, meaning all other factors, such as input costs, technology, future expectations, and the number of sellers, are held constant.

The rationale behind the law of supply lies in the profit motive of producers. Higher prices offer the potentia; to supply more of the good or service. Conversely, producers may scale back their production when prices decrease to avoid losses.

This relationship is depicted by the upward-sloping supply curve. Movement along the supply curve occurs when there is a change in the price of the product while other factors remain constant. If the price increases, producers move along the curve to supply a higher quantity. If the price decreases, they move to supply a lower quantity. This demonstrates the direct relationship between price and quantity supplied.

The law of supply explains how the quantity supplied of goods changes in response to a change in price.

A positive relationship exists between the price of a good and the quantity supplied, keeping all the other factors constant.

The assumption that all other variables remain constant allows for the analysis of how price changes affect the quantity supplied, unaffected by changes in factors like cost of inputs, technology, future expectations, and number of sellers.

Graphically, the law of supply can be represented as an upward-sloping curve with quantity supplied on the x-axis and price on the y-axis.

Consider the law of supply with a lemonade example. During a hot summer, increased demand drives up lemonade prices. In response, sellers boost production by working longer hours, investing in more lemon-squeezing machines, or hiring additional staff, leading to an upward movement along the supply curve.

Conversely, in cooler seasons, decreased demand results in a downward movement along the supply curve. 

The fluctuation in price influences seller's decisions, impacting the quantity they are willing to supply.

• Law of Supply - Law concerning quantity and price of goods supplied by producers.
• Quantity Supplied - Quantity offered by producers for a particular price.
• Upward-Sloping Supply Curve - Graphical representation of the direct relation between price and quantity supplied.
• Profit Motive - The drive of producers to increase production in response to higher prices.
• Ceteris Paribus - Latin phrase meaning 'all other things being equal'; used in theoretical economic models.

• Define Law of Supply – Understand how price affects producers' supply of goods (e.g., law of supply).
• Contrast Quantity Supplied vs Supply – Explain key differences (e.g., supply curve).
• Explore Examples – Describe scenario where producers might increase or decrease supply in response to price changes (e.g., profit motive).
• Explain Economic Models – Explain how assumptions like ceteris paribus are used in models.
• Apply in Context – Demonstrate understanding of supply and its relationship with price.

• What is the law of supply and how does it affect quantity supplied?
• How does the supply curve help visualize the relationship between price and quantity supplied?
• What role does the profit motive play in the law of supply?

• Students – Understand how the law of supply helps shape economic behaviors and markets
• Educators – Provides a clear framework for teaching supply in economics
• Researchers – A fundamental economic principle for study and research
• Business Enthusiasts – Useful to understand market dynamics and business strategy