What Is the Law of Supply? 3 Law of Supply Examples

The law of supply is a fundamental concept in microeconomics that governs supply at a given price. The law of supply states that when the market price of a good increases, suppliers will increase the supply of that good. And when the price decreases, the quantity they will supply decreases.

When employing the law of supply concept, economists assume that only the price changes and all other variables that can affect supply (like consumer mindset or materials cost) remain constant. On a graph with quantity (the dependent variable) on the horizontal axis and price (the independent variable) on the vertical axis, the law of supply forms an upward slope, called a supply curve, which shows the relationship between the cost of a product and the quantity that suppliers can (or will) supply.

The law of supply is closely linked to the law of demand, which states that higher prices lead to lower demand, and lower prices lead to higher demand. The consumer demand curve—a graph representing the link between the cost of a good and customer demand—is a downward slope and intersects the supply curve at the market equilibrium point, which is when the demand for a product and the supply are equal. When economists discuss these concepts together, they often refer to them as the law of supply and demand.

The law of supply works in three major steps:

1. 1. The price of a good increases. Suppliers may change the selling price of a product based on any number of determinants, including quality, demand, cost of production, consumer income and mindset, taxes, and even supply and demand.
2. 2. Suppliers see more incentive to sell. When the price of the product rises, suppliers see more incentive to sell higher quantities of the good. They may increase the gathering of materials, divert resources from other markets, or make other changes in their business structure to increase the production of a particular good or service.
3. 3. The supply increases. After a certain period of time in the supply schedule, the fresh supply of goods will hit the market, increasing the number of goods supplied to the market. Thus, when the price increases, the supply increases.

The law of supply operates throughout the market:

1. 1. Price rises, supply rises. Due to a new study on the health benefits of apples, the price of apples rises, so apple harvesters begin to work overtime to harvest more apples to offer to the public.
2. 2. Price falls, supply falls. Due to a general shift away from cotton clothing, the price of cotton shirts falls, and textile manufacturers begin supplying fewer cotton shirts.
3. 3. Different values, different supplies. If a manager offers employees time-and-a-half pay for overtime hours, workers will be more willing to supply more overtime hours; if a manager offers standard pay for overtime hours, workers will supply fewer overtime hours.

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