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What is the law of supply?  

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esther77 | Honors

Posted April 18, 2013 at 12:45 AM via web

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What is the law of supply?  

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted April 18, 2013 at 12:53 AM (Answer #1)

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The law of supply is one of the most basic ideas in economics.  Along with the law of demand, it typically determines prices and quantities of various goods and services in a market economy.

The law of supply, simply put, states that sellers will be willing and able to produce more of a good when the price for which it can be sold goes up.  It is important to note that it is not the price of making the good that is being discussed here; it is the price for which the good can be sold.  To put it differently, the law of supply says that if I can get paid more to make something, I will make more of that thing than I would have before its price went up.

Let us think of an example of this.  Let us say that a car maker produces cars that cost $10,000 to make.  They usually sell for $12,000.  Now let us say that for some reason demand goes up and the cars will now sell for $20,000.  The seller goes from making $2,000 profit per car to making $8,000 profit.  Not surprisingly, the seller will want to make more of the cars now because making them is so much more profitable.

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