How is it possible that supply increases with an increase in price?
As according to law of demand that as the prices increases the demand will decreases its clear....but how can it be possible that supply increases with increases in price?
2 Answers | Add Yours
For this, please keep in mind that the price you are referring to is the price at which suppliers can SELL the good are service. Once you remember this, it should make more sense.
Think about it like this: let's think about lawyers. If legal services could be sold for $10 an hour, not very many people would want to be lawyers and the supply would be low. Now think what happens if (all other things remaining equal) legal services can be sold for $100 per hour. Imagine how many more people would want to become lawyers because the pay would be so good.
So: supply goes up as the price of SELLING that good or service goes up. That's because people will be more interested in providing a good or service the more money they can get for doing so.
Supply and and demand are both related to the market price of goods. In economics, supply refers to the quantities of a good that manufacturers or suppliers are willing go sell, and demand refers to quantities of a good that consumers are willing to buy. Both supply and demand are related to the price, but there are many other factors that affect supply and concept. As a result demand decreases with increase in price, but demand increases with increases with increase in supply. Thus demand follows the law of downward sloping demand curve, while supply follows law of upward sloping demand curve.
It is not that supply and demand are always equal. These are equal only for the market equilibrium price. As a matter of fact market equilibrium price may be defined as the price at which supply equal demand. Depicted graphically this is the point at which demand curve intersects the supply curve. At this equilibrium price market is in equilibrium because the demand and supply is equal and therefore suppliers cannot increase prices without reducing demand, which would result in surplus production they cannot sell. Also they have no compulsion to reduce the price as they find that they are already selling all that they produce at a price they consider in their best interest. If they reduce price they will need to increase production and the marginal cost of production is likely to exceed the additional revenue generated by higher sales.
We’ve answered 327,869 questions. We can answer yours, too.Ask a question