What is the law of supply?
The Law of Supply states that, in general, an increase in price leads to an increase in supply and vice versa. Put simply, as the price of a good or service increases, suppliers are more likely to produce additional units. This is because potential profits will be higher. When the price of a product decrease, suppliers have less incentive to produce more units, thus decreasing the supply.
Assumptions of the Law of Supply
This law is based on several key assumptions.
First, it assumes that producers have access to sufficient inputs (i.e., resources and materials) to respond to higher prices. This means that when prices increase, producers can increase their production levels because they have enough supplies and equipment to do so.
Moreover, it assumes that producers act rationally in responding to changes in price—this means that they will only choose to increase production if doing so will lead to an overall economic benefit (i.e., higher profits).
Implications of Law of Supply
The law of supply states that a price increase will increase production. It has implications for suppliers, specifically those who offer something of low value or availability. A high demand and a higher price can mean increased profits at first, but if there is too much competition from other suppliers, this could ultimately drive prices back down and eliminate any excess profit. It also has implications for large-scale production operations, as the rising cost of resources such as raw materials and labor could harm their ability to generate a profit.