The Law of Supply

The Law of Supply states that, other things remaining constant (ceteris paribus), the quantity supplied of a commodity is directly (positively) related to its price — as price rises, quantity supplied rises, and as price falls, quantity supplied falls.

Assumptions. The law holds only when the cost of production, technology, prices of related goods, government policy and producers' price expectations remain unchanged, and the commodity is not one of the recognised exceptions discussed next.

Why does supply rise as price rises? Two broad reasons are usually given:

1. Profit motive. At a higher price, a given unit of output earns a producer a larger margin over cost, so producers are induced to raise output — by using existing capacity more fully, or by drawing in resources previously employed elsewhere. A higher price can also attract new firms into the industry, raising market supply further. …