Supply & Demand- The Law of Supply

The law of supply and the law of demand are amongst the most fundamentally important concepts of economics. It is crucial to have a thorough understanding of both supply and demand because these laws together serve as models to explain the market economy.

Today we will examine the law of supply. Supply is the amount of goods or services made available on the marketplace by producers. Below is a supply and demand model with only the supply curve present. On every supply and demand model, there is an x-axis that represents quantities and a y-axis that represents prices. The quantity supplied in the marketplace is dependent upon the price. This holds true because a good will not be available on the market if the price is not greater than or equal to the producer's willingness to sell. The area below the price and above the supply curve represents the producer surplus or profit. The relationship between quantity and price is as follows:

• An increase in price results in an increase in quantity
• A decrease in price results in a decrease in quantity
• Supply curves are always upward sloping as a result of the quantity and price relationship

Along any given supply curve, a change in price yields a different quantity available. While quantity supplied may increase or decrease as a result of price changes, the entire supply curve can actually shift. Supply curves can either shift to be an increase in supply or decrease in supply. In increase in supply shifts the supply curve to the right of the original curve and a decrease in supply shifts the original supply curve to the left.

An increase in supply causes:

• Higher quantities to be available at the same price of the original supply curve
• The same quantities to be available at a lower price than the original supply curve

A decrease in supply causes:

• Lower quantities to be available at the same price than the original supply curve
• The same quantities to be available at a higher price than the original supply curve

There are numerous factors that can attribute to an increase or decrease in supply. Some of these factors are:

• Input Prices: if the cost of production increases by a government regulation or through increased scarcity of other goods then the supply curve shifts to the left (decreases). If the costs of production decrease or regulation becomes less burdensome then the supply curve shifts to the right (increases).
• Taxes & Subsidies: taxes result in an a decrease in the supply curve and subsidies result in an increase in the supply curve. 
• Number of Sellers: The more suppliers that enter the market results in an increase in the supply curve. The exit of suppliers causes a decrease in supply. 
• Technology: New technology makes production more efficient and innovative and shifts the supply curve to the right (increase).