The Law of Supply
The Law of Supply and the Supply Curve
Supply is slightly more difficult to understand because most of us have little direct experience on the supply side of the market. Supply is derived from a producer's desire to maximize profits. When the price of a product rises, the supplier has an incentive to increase production because he can justify higher costs to produce the product, increasing the potential to earn larger profits. Profit is the difference between revenues and costs. If the producer can raise the price and sell the same number of goods while holding costs constant, then profits increase.
The law of supply holds that other things equal, as the price of a good rises, its quantity supplied will rise, and vice versa. Table 2 lists the quantity supplied of rental videos for various prices. At $5, the producer has an incentive to supply 50 videos. If the price falls to $4 quantity supplied falls to 40, and so on. The figure titled "Supply Curve" plots this positive relationship between price and quantity supplied.
| TABLE 2 Supply of Videos | |
|---|---|
| Price | Quantity Supplied |
| $5 | 50 |
| $4 | 40 |
| $3 | 30 |
| $2 | 20 |
| $1 | 10 |
A supply curve is a graphical depiction of a supply schedule plotting price on the vertical axis and quantity supplied on the horizontal axis. The supply curve is upward-sloping, reflecting the law of supply.
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