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What Is the Law of Supply?

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  • Written By: Ken Black
  • Edited By: Andrew Jones
  • Last Modified Date: 26 July 2014
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The law of supply is a basic economic principle stating that as supply for a certain product increases, the price for that product will also increase. This is typically seen with new products that are in high demand, but may also apply to many other products, including commodities. The laws of demand and supply are often compared and used with one another, but are independent economic theories.

While the law of supply suggests that companies tend to maximize profits by producing products as their price increases, that is not always the case. Certainly, if a company sees a price increase and can produce a product for the same cost, it will take advantage of that situation as long as it can. In some cases, however, producing more of a product leads to certain inefficiencies. For example, a company may have to pay overtime or call for unscheduled deliveries, both of which make production more expensive. This could increase the price, yet only maintain the profit margin at previous levels.

In economics, the law of supply is often noted with what is known as a supply curve, though typically the model is a straight line extending upward from left to right. On the x-axis, or horizontal line, is the quantity. On the y-axis, or vertical line, is the line for price. Typically, the model is shown just for general reference, with no product, price, or supply quantity being mentioned on the graph.

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There is a close association between the laws of demand and supply because the two work hand in hand. As the supply increases with the price, demand will eventually drop. Eventually, that will lead to a drop in price as companies try to get rid of excess inventory. Often, the two lines are shown on the same graph and jointly referred to as the law of supply and demand, even though they are two separate laws. Generally, supply and demand are two opposing forces that work against each other until supply and demand come into equilibrium.

Given the law of supply indirectly suggests that maximizing profits encourages a company to produce more, many see this law as a way to stimulate economies during periods of recession. These individuals subscribe to what is known as the supply-side theory. They often cite this theory as a reason for lowering income and other taxes on corporations in an effort to stimulate the private sector and encourage economic growth.

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Discuss this Article

subway11
Post 3

@Cupcake15 - I know what you mean, but the flip side is also true. If you have a huge supply of a product, you will have to drastically reduce the price in order for the product to sell. Sometimes it is a miscalculation on the part of the retailer. They thought that a trend was going to be more popular than it was.

These types of miscalculations can really cost the store a lot of money because they will be forced to take in lower profits because of the excess supply which is really another law of supply example.

cupcake15
Post 2

I agree and I also think that an example of the law of supply could also involve tickets to a concert or sporting event. Sometimes these tickets are sold out so quickly that people that actually bought the tickets try to resell the tickets at a much higher price in order to make a profit. Sometimes you will see tickets that normally retailed for $100 sold for about ten times that.

Although scalping tickets like this is illegal a black market usually develops when there is a drastic reduction in supply but the demand is still high. That is really how I would define the law of supply.

Bhutan
Post 1

I think that as the demand for a product goes up so does the price. For example, gasoline prices were rising with increased demand, however, when the price got too high people altered their lifestyle so that they could save money because once the price of gas reached $4.00 it became a burden for a lot of people so they took up car pooling measures or simply took public transportation in order to offset the high price of fuel.

This has also lead to a small decline in the gas prices. The price of gasoline has declined an average of 15 cents a gallon as a result of the reduced consumption. Which is great news and shows how the law of demand and supply work.

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