Learn It 2.3.2: Microeconomics

The Nature of Supply

law of supply

Supply is the quantity of a good or service that businesses will make available at various prices. According to the law of supply, there is a direct relationship between price and the quantity that businesses will make available. The higher the price, the greater the quantity supplied. Lower prices will correspond to lower quantities supplied. A graph of this relationship is called a supply curve.

We can again plot the quantity of coats on the x-axis and the price on the y-axis. As shown below, 800 coats will be available at a price of $100. Note that the supply curve slopes upward and to the right, the opposite of the demand curve. If people are willing to pay higher prices, suppliers of coats will buy more inputs (for example, fabric, dye, thread, machinery, labor) and produce more coats. The quantity supplied will be higher at higher prices, because manufacturers can earn higher profits.

The horizontal x axis is labeled quantity, and is labeled from left to right, 0 to 1,400 in increments of 200. The vertical y axis is labeled price, and is labeled, from bottom to top, 0 dollars to 200 dollars in increments of $25. Points are plotted on the graph, and connected with a solid line. The points are plotted at approximately 275, $40, and 450, $60, and 700, $80, and 800, $100, and 975, $120, and 1100, $135, and 1325, $155. A dashed horizontal line extends from 100 dollars on the y axis, and a vertical dashed line extends from 800 on the x axis and meet at the plotted point 800, $100.
Figure 1. The supply curve shows the direct relationship between price and quantity supplied.