The law of supply states that if there’s an increase in the price of a good or service there’s going to be a corresponding increase in the quantity of that good or service that is supplied and conversely if the price goes down if there’s a decrease in the price then there’s going to be a corresponding decrease in the quantity supplied.
So let’s think about ice cream, so as the price of ice cream goes up, ice cream suppliers are going to be willing to supply more ice cream but if the price of ice cream were to go down then ice cream suppliers would be willing to supply less and less of it as the price goes down and we’re holding everything else constant all else equals ceteris paribus, we’re just looking at what happens to the quantity supplied when there’s a change in the price of the good or service.
A similar assumption to the law of demand only it’s working in an opposite way because if you remember from a law of demand we said that if there’s an increase in the price of a good then the consumers are going to demand less of it but with suppliers, it works in the opposite way if there’s an increase in the price suppliers are willing to supply more of the good or service.
Let’s think about the market for chocolate bars and we can put together something called a supply schedule where we look at different prices and we say okay at this price what would be the quantity that producers would be willing to supply. So when we’re talking about the quantity we’re talking about quantity supplied. At a price of one dollar or one euro let’s say that chocolate bar producers wouldn’t produce any chocolate bars at all they say “Hey we’re not going to produce any” so the quantity would be zero but if the price were to go up to two dollars then they’d say “You know what we would supply three chocolate bars at that price”. If the price is at three dollars then they’d be willing to supply six chocolate bars and so we see that as the price goes higher and higher and ultimately gets up to $5 the quantity supplied goes higher and higher so at a price of five dollars they’re willing to supply 12 chocolate bars where if the price were only one dollar they won’t supply any chocolate bars at all.
That reflects the law of supply, we say that as the price is increasing of the chocolate bars the quantity that producers are willing to supply that’s also increasing as well, we’ve got an increase in the price that leads to an increase in the quantity supplied. Now what we can do is we can create a graph and with this graph, we can create a supply curve where we plot out all the points for our supply schedule and we can see how it looks graphically.
Let’s take the price of $1, we always have price on our y-axis and quantity on the x-axis and in this case, remember quantity is quantity supplied, at a price of $1 the producers are willing to supply zero chocolate bars, At a price of $2 they’re willing to supply three chocolate bars, at a price of $6 they’re willing to supply six chocolate bars and at a price of $4 to willing to supply nine chocolate bars and then if the price goes up to $5 they’re willing to supply 12 chocolate bars.
Now what we can do is we can draw a line through the graph. In the real world, the supply curve is not always going to be a straight line but here, in this case, it is. What this is reflecting is the fact that this curve is going up, it’s sloping upward that is telling us that we’ve got the law of supply in action. As the price is going up as it gets higher and higher than the quantity supplied is also going higher and higher.
So we have an upward sloping supply curve and so we would label this S1. Now we can have things to happen that change something other than price, for example, if there were to be a change that made it a lot cheaper to manufacture chocolate bars for example if labor became cheaper or some factor of production for producing chocolate bars became cheaper, we could actually have a shift where the supply curve shifts to the right. Then we would have S2 or conversely, it could also have something, let’s say a factor of production becomes more expensive we could have a shift to the left and so we’ll talk about these shifts and the things that can cause a shift in supply in the articles to come.