Reviewed by Jan 05, 2021| Updated on
The law of supply states that the price shows a linear relationship to the volume of goods when all other factors are equal. The price of a good or service will increase and, in turn, the size of goods or services that the suppliers offer will increase, and vice versa.
The law of supply asserts that as the price of an item moves up, suppliers will strive to maximize their profits by raising the volume offered for sale. The law of supply is a microeconomic law and works across the industries and business constitutions.
The law of supply shows the impact that the price changes have on the behaviour of the producer. For instance, a business will build more video game systems if the price of the video game system increases. On the other hand, the business will build video games lesser in number if the price of video game systems decreases.
The company might supply 1,00,000 systems if the price is Rs 2,000 each, but if the price increases to Rs 3,000, they might supply 1,50,000 systems. It also depicts an increase in demand. Graphically, while presenting this concept, if supply is ‘Y’ axis and price is ‘X’ axis, a linear relationship is observed.
To further demonstrate this theory, consider how gas prices work. When the price of gas rises, it stimulates profit-seeking firms to take several actions. They might expand exploration for oil reserves or drill for more oil.
Alternatively, they can invest in more pipelines and oil tankers to bring the oil to plants where it can be refined into gasoline. It further includes building new oil refineries, purchasing additional pipelines and trucks to ship the gas to gas stations, and establish more gas stations or keep existing gas stations working for longer hours.
Supply in a market can be represented as an upward sloping curve on a graph that shows how the quantity supplied will react to various prices over some time. Because the businesses look forward to increasing their revenue when they expect to receive a higher rate, they will produce more.