Supply Concepts

Law of Supply

from Basic Economic Principals - A Guide For Students by David E. O'Connor and Christopher Faille

Greenwood Press, Westport, CT (2000)

Supply refers to the amount of a good or service that produccers are willing and able to sell at a series of prices in a given period of time. Note that the entire perspective has changed from that of the consumer to that of the producer. Keep in mind that the producer must make a profit or the firm will go out of business. This fact influences producers decisions about how much of a good they will produce or sell at a series of prices.

The law of supply states that there is a direct relationship between the price and the quantity supplied of a good. That is, as the price of a good increases, producers will increase the quantity supplied. If, on the other hand, the price of a good falls, producers will reduce the quantity supplied.

The market equilibrium is the compromise that muste be reached so that both consumers and producers are satisfied with the price of a good and with the quantity available for purchase.

The elasticity of supply measures the impact of prices on the quantity supplied of a good. The supply of a good is elastic when a change in its price has a major impact on the quantity supplied.