Law Of Supply

What Does Law Of Supply Mean?

A microeconomic law stating that, all other factors being equal, as the price of a good or service
increases, the quantity of goods or services offered by suppliers increases and vice versa.

Investopedia explains Law Of Supply

As the price of a good increases, suppliers will attempt to maximize profits by increasing the
quantity of the product sold.

The Supply Curve

The relationship between the quantity sellers want to sell during some time period
(quantity supplied) and price is what economists call the supply curve. Though usually
the relationship is positive, so that when price increases so does quantity supplied, there
are exceptions. Hence there is no law of supply that parallels the law of demand.

The supply curve can be expressed mathematically in functional form as

Qs = f(price, other factors held constant).

It can also be illustrated in the form of a table or a graph.

A Supply Curve
Price of Number of Widgets
Widgets Sellers Want to Sell
$1.00 10
 $2.00 40
$3.00 70
$4.00 140

The graph shown below has a positive slope, which is the slope one normally expects
from a supply curve.

If one of the factors that is held constant changes, the relationship between price and
quantity, (supply) will change. If the price of an input falls, for example, the supply
relationship may change, as in the following table.

A Supply Curve Can Shift

Price of Number of Widgets
Widgets Sellers Want to Sell
$1.00 [10] becomes 20
$2.00 [40] becomes 60
$3.00 [70] becomes 100
$4.00 [140] becomes 180

The same changes can be shown with a graph that shows the supply curve shifting to the
right. Notice each price has a larger quantity associated with it.
What is elastic demand?
Elastic demand means that demand for a product is sensitive to price changes. For
example, if the selling price of a product is increased, there will be fewer units sold. If the
selling price of a product decreases, there will be an increase in the number of units sold.
Elastic demand is also referred to as the price elasticity of demand.
The term inelastic demand means that the demand for a product is not sensitive to price
changes.
Elastic demand is a major concern for a manufacturer that attempts to set product prices
based on costs. For instance, if the manufacturer’s production and sales have declined
and it fails to cut fixed costs, the manufacturer could be worse off by increasing selling
prices
In elastic demand
Desire for a product or service that does not vary with increases or decreases in price.
Products that are daily necessities, and for which there are few alternatives, tend to
exhibit inelastic demand. For example, the demand for bar soap, salt, and milk is
relatively inelastic. In contrast, demand for vacation travel, premium ice cream, and
entertainment tends to be elastic.
Unit elastic demand
If quantity demanded changes by exactly the same proportion when price changes,
then

You would say that demand is unit elastic at that price. Any percentage change in
price is matched by an equal percentage change in quantity demanded.
Looking at the graph above, you can see that a 5 percent increase in price causes a
5 percent decrease in quantity demanded. Therefore, Ed = -1 and demand is unit
elastic.