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Course: Microeconomics > Unit 2
Lesson 2: SupplyLaw of supply
If the price of something goes up, companies are willing (and able) to produce more of it.
Key points
- The law of supply states that a higher price leads to a higher quantity supplied and that a lower price leads to a lower quantity supplied.
- Supply curves and supply schedules are tools used to summarize the relationship between supply and price.
Supply of goods and services
When economists talk about supply, they mean the amount of some good or service a producer is willing to supply at each price. Price is what the producer receives for selling one unit of a good or service. An increase in price almost always leads to an increase in the quantity supplied of that good or service, while a decrease in price will decrease the quantity supplied.
When the price of gasoline rises, for example, it encourages profit-seeking firms to take several actions: expand exploration for oil reserves, drill for more oil, invest in more pipelines and oil tankers to bring the oil to plants where it can be refined into gasoline, build new oil refineries, purchase additional pipelines and trucks to ship the gasoline to gas stations, and open more gas stations or keep existing gas stations open longer hours.
Economists call this positive relationship between price and quantity supplied—that a higher price leads to a higher quantity supplied and a lower price leads to a lower quantity supplied—the law of supply. The law of supply assumes that all other variables that affect supply are held constant.
Supply schedule and supply curve
- A supply schedule is a table that shows the quantity supplied at each price.
- A supply curve is a graph that shows the quantity supplied at each price. Sometimes the supply curve is called a supply schedule because it is a graphical representation of the supply schedule.
Here's an example of a supply schedule from the market for gasoline:
| Price (per gallon) | Quantity supplied (millions of gallons) |
|---|---|
Price is measured in dollars per gallon of gasoline, and quantity supplied is measured in millions of gallons.
Here's the same information shown as a supply curve with quantity on the horizontal axis and the price per gallon on the vertical axis. Note that this is an exception to the normal rule in mathematics that the independent variable goes on the horizontal axis and the dependent variable goes on the vertical.
The shape of supply curves will vary somewhat according to the product: steeper, flatter, straighter, or more curved. Nearly all supply curves, however, share a basic similarity: they slope up from left to right and illustrate the law of supply. As the price increases, say, from $1.00 per gallon to $2.20 per gallon, the quantity supplied increases from 500 million gallons to 720 million gallons. Conversely, as the price decreases, the quantity supplied decreases.
The difference between supply and quantity supplied
In economic terminology, supply is not the same as quantity supplied. When economists refer to supply, they mean the relationship between a range of prices and the quantities supplied at those prices—a relationship that can be illustrated with a supply curve or a supply schedule. When economists refer to quantity supplied, they mean only a certain point on the supply curve, or one quantity on the supply schedule. In short, supply refers to the curve, and quantity supplied refers to a specific point on the curve.
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so just to be clear with the difference between law of demand and law of supply.
law of demand deals with consumers and what they buy
law of supply deals with producers and what they make
am i right? if not please tell me because that's what i understand(57 votes)
Yes, the law of demand is about consumers who buy stuff and the law of supply is about producers who make and sell stuff.(37 votes)
- Is the law of supply unique to capitalist economies?(12 votes)
The law of supply in this sense follows the ideas shown in the very first video Sal uses to discuss economics as a subject. That is, the ideas of Adam Smith. Adam Smith assumes that most actors in a society will behave in scenarios in a way that is in their best interest. Other economies, such as one in a socialist or monarchial country, do not assume this behavior. They assume that people behave in the interest of the common good, and the interest of the King/Queen respectively. So their supply laws would work differently. Economics as a general study on this website is assuming a capitalist (free) market.(31 votes)
"A rise in price almost always leads to an increase in the quantity supplied of that good or service, while a fall in price will decrease the quantity supplied."
Ok, I....am a little confused... as usual.... In the first paragraph it states that a rise in the price leads to an increase of a product or Quantity Supply, if that be true, when the price rises people tend not to buy a product/service or ration it, which would mean that the demand will decrease, so why would the quantity increase if the demand decreases ...or am I jumping ahead of myself or missing some pieces of the puzzle?
And another question, does the producer not control the price of his good or service, why does it seem that the price influences the producer to produce and not the quantity demanded?...for example i would think that if you you're providing a service and you have a growing clientele then the price for your service or good will rise to cover overheads(9 votes)
I will try to answer your first question. There are two Curves that need to be considered. The first, which Sal is talking about in your scenario, is the Supply Curve. With increase in Price, Suppliers will provide a higher Quantity. The Supply Curve, by itself, assumes nothing about the Quantity that will be consumed. The second curve is the Demand Curve, which determines consumption at any given Price. So we need to overlap the Supply Curve and the Demand Curve. Only at the point where the lines cross is the Market in Equilibrium where at a certain Price the Quantity Supplied equals Quantity Demand. If the Price is set above the Equilibrium Price, then the Quantity Supplied will be higher than the Quantity Demanded and there will be a surplus which will drive the Price back to the Equilibrium Price. If the Price is set below the Equilibrium Price, then the Quantity Supplied will be lower than the Quantity Demanded and there will be a shortage which will drive the Price back to the Equilibrium Price. At least that is my understanding.(28 votes)
This law of supply explained is from the producer or manufacturer's side. What about consumers' behaviors, that too can affect Law of Supply.(4 votes)
Consumer's behavior affects demand, not supply. Supply is how many units the seller will try to sell at a given price. It doesn't matter what consumers will try to do, because they are not the seller.(22 votes)
- Can someone please clarify this?
So if the price of the product is higher, the more the supply would be. And when the price is lower, the lower the supply would be too. But what about the demand? Aren't there supposed to have more supply when the price is low, when the demand is high?(6 votes)- No. Suppliers don't actually care how much people want something. They only care about the price they can sell it at. If there is high demand, then the price is going to be higher, but if the price is low, then it doesn't matter how much demand there is.(8 votes)
If supply increases and the population willing to buy is held constant, then isn't a scenario created where goods and services are in surplus and demand hasn't increased. Well in that case prices do go down do they?(5 votes)
The companies will compete with more offerers. Then, to be more competitive, they will improve services, reduce costs or decrease their prices.(5 votes)
I just wanted to clarify if for example - A good here is a car.. so if the price of the car increases , lesser people will want to buy it right? if the income is normal. So in this case , quantity demanded is less due to the increase in price and then supply will decrease isn't it? Please correct me if I've gone wrong somewhere!(2 votes)
The idea of demand and supply laws is that all variables are held constant except for a price. In this topics price is changed for whatever reasons and it is the given. What you are talking about is relationship between the supply and the demand, I think it will covered in the next tutorial.(7 votes)
- How will Ps5 be impacted if they demand more, but the price decreases?(4 votes)
- if the price decreases it wont be as profitable to make ps5 for sony and they might produce less consoles. a lower price leads to a higher quantity of ps5 demanded by the customers. Maybe they'll be a ps5 shortage but we haven't learnt about supply shortages yet(1 vote)
- what do you mean by saying If the price of something goes up, companies are ABLE to produce more of it.(2 votes)
They won't produce something that they can't make money selling.(4 votes)
I'm not sure about the sentence: "Supply curves and supply schedules are tools used to summarize the relationship between supply and price". Shouldn't it be "relationship between quantity supplied and price"?(2 votes)