Law of supply
The law of supply is a fundamental principle of economic theory which states that, keeping other factors constant, an increase in price results in an increase in quantity supplied.[1] In other words, there is a direct relationship between price and quantity: quantities respond in the same direction as price changes. This means that producers are willing to offer more of a product for sale on the market at higher prices by increasing production as a way of increasing profits.[2]
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In short, the law of supply is a positive relationship between quantity supplied and price and is the reason for the upward slope of the supply curve.
Empirical data, however, shows that the supply curve for mass produced goods is often downward sloping. As production increases, unit prices go down. And, conversely, if demand is very low, unit prices go up. This corresponds to economies of scale.[3]
Mathematical definition
In non-differentiable terms, the law of supply can be expressed as:
where y is the amount that would be supplied at some price p, and y' is the amount that would be supplied at some other price p' . Thus for example if p > p' then y > y' .[4]
References
- Mas-Colell, A., Whinston, M. Green, J.: Principles of Microeconomics. Oxford University Press., pg 138. 1995.
- Rittenberg, L. & Tregarthen, T.: Microeconomics
- https://talkmarkets.com/content/investing-ideas--strategies/the-problem-with-the-supply-curve
- Mas-Colell, d., lucrezi, M. Green, J.: Principles of Microeconomics. Oxford University Press., pg 138. 1995.