Supply and the Law of Supply

Revenue explains what a firm earns; supply explains how much it is willing to offer for sale. Supply is not the same as stock: supply is the quantity of a good that a seller is willing and able to offer for sale at a given price during a given period of time. A quantity sitting in a warehouse is stock; it becomes supply only when offered at a price.

The Law of Supply states that, other things remaining constant (ceteris paribus), the quantity supplied of a good rises when its price rises and falls when its price falls — that is, price and quantity supplied move in the same direction (a direct or positive relationship). This is why the supply curve slopes upward from left to right, unlike the downward-sloping demand curve.

The reasons behind the law are practical and profit-based:

• A higher price raises the profit per unit, encouraging existing firms to produce and offer more.
• A higher price makes it worthwhile to bring higher-cost units into production.
• A sustained higher price attracts new firms into the industry, adding to market supply. …