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law of supply The principle that, other things equal, an increase in the price of a product will increase the quantity of it supplied; and conversely for a price decrease.

Law of Supply

Table -5 shows a direct relationship between price and quantity supplied. As price rises, the quantity su lied rises; as rice falls, the quantity su lied falls. This relationship is called the law of supply. A supply schedule tells us that firms will produce and offer for sale more of their product at a high price than at a low price.

Price is an obstacle from the standpoint of the consumer, who is on the paying end. The higher the price, the less the consumer will buy. But the supplier is on the receiving end of the product's price. To a supplier, price represents revenue, which serves as an incentive to produce and sell a product. The higher the price, the greater the incentive and the greater the quantity supplied.

Consider a farmer who can shift resources among alternative farm products. As price moves up, as shown in Table -5, the farmer finds it profitable to take land out of wheat, oats, and soybean production and put it into corn. And the higher corn prices enable the farmer to cover the increased costs associated with more intensive cultivation and the use of more seed, fertilizer, and pesticides. The overall result is more corn.

Now consider a manufacturer. Beyond some quantity of production, manufacturers usually encounter increasing costs per added unit of output. Certain productive resources—in particular, the firm's plant and machinery—cannot be expanded quickly. So the firm uses more of the other resources, such as labour, to produce more output. But as time passes, the existing plant becomes increasingly crowded and congested. As a result, each added worker produces less added output, and the cost of successive units of output rises accordingly. The firm will not produce those more costly units unless it receives a higher price for them. Again, price and quantity supplied are directly related.

supply curve A curve illustrating the positive (direct) relationship between the quantity supplied of a good or service and its price, other things equal.

DEtERMinants of supply Factors other than its price that determine the quantities supplied of a good or service.

The Supply Curve

As with demand, it is convenient to represent supply graphically. In Figure -4, curve S1 is a graph of the market supply data given in Table -6. Those data assume there are 200 suppliers in the market, each willing and able to supply corn according to Table -5. We obtain the market supply curve by horizontally adding the supply curves of the individual producers. Note that the axes in Figure -4 are the same as those used in our graph of market demand (Figure - ), except for the change from "quantity demanded" to "quantity supplied" on the horizontal axis.

Determinants of Supply

In constructing a supply curve, we assume that price is the most significant influence on the quantity supplied of any product. But other factors (the "other things equal") can and do affect supply. The supply curve is drawn on the assumption that these other things are fixed and do not change. If one of them does change, a change in supply will occur, meaning that the entire supply curve will shift.

The basic determinants of supply are (1) resource prices, (2) technology, ( ) taxes and subsidies, (4) prices of other goods, (5) price expectations, and (6) the number chapter three

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