Law of Supply
What is Law of Supply?
The law of supply states that quantity supplied rises when price rises, holding all else constant.
The law of supply describes the positive relationship between price and quantity supplied. When the price of a good rises, producers are willing and able to supply more of it. Conversely, when the price falls, producers are willing and able to supply less. This holds true as long as other factors like technology and input costs remain constant.
Law of Supply: a worked example
A beekeeper's weekly supply schedule for honey runs like this: at $4 a jar she offers 200 jars, at $6 she offers 300, and at $8 she offers 400. Quantity supplied climbs with price, which is the law of supply. Take elasticity of supply from $4 to $6 off the starting values: quantity rises 100/200, or 50%, while price rises $2/$4, also 50%, so elasticity is 50 divided by 50, or 1.0. From $6 to $8 quantity rises 100/300, or 33.3%, and price rises $2/$6, also 33.3%, giving 1.0 again. Revenue grows from 200 x $4 = $800 to 400 x $8 = $3,200. She extends output because marginal cost rises: the extra jars need overtime hours and rented hives, so only a higher price makes those last jars worth producing.
The mistake students make with law of supply
Students explain the upward slope by saying producers are greedy for profit, which earns no credit because greed does not vary with the price. The rubric wants rising marginal cost: later units draw on overtime pay, less productive equipment, or costlier inputs, so only a higher price covers them. A second slip is calling a drop in input costs an example of the law of supply. Cheaper inputs shift the whole supply curve to the right, while the law of supply concerns the good's own price only.
Law of Supply questions
Why does the supply curve slope upward?
Rising marginal cost explains the slope. As a firm expands output in the short run it adds workers to a fixed stock of capital, so each additional worker adds less product than the last and the cost of one more unit climbs. A producer makes those costlier units only if the price covers them, which is why higher prices call forth larger quantities supplied.
What is the difference between a change in supply and a change in quantity supplied?
Quantity supplied changes when the good's own price changes, and the producer simply relocates to a different point on the same supply curve. Supply changes when the whole curve shifts, driven by input prices, technology, taxes and subsidies, the number of sellers, or producer expectations. A cheaper input therefore increases supply, while a higher market price increases quantity supplied. Free response rubrics award points for using the right phrase.
Does the law of supply hold in the long run?
The law of supply holds over both horizons, but the size of the response differs. In the short run at least one input is fixed, so a firm stretches output only through overtime and heavier use of existing equipment, and quantity supplied rises modestly. Given enough time, firms build capacity and new sellers enter, so the same price increase brings a much larger increase in quantity supplied.
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Related terms
Common comparisons
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