The law of supply states that as supply for a product increases, so does the price. It can lead to inefficiencies for companies producing multiple products. Supply and demand work together, and the law of supply is often used to stimulate economies during recessions.
The law of supply is a basic economic principle which states that as the supply for a particular product increases, so will the price for that product. This is typically seen with new products that are in high demand, but it can also apply to many other products, including commodity products. The laws of supply and demand are often compared and used against each other, but they are independent economic theories.
While the law of supply suggests that companies tend to maximize profits by producing products as their price rises, this isn’t always the case. Of course, if a company sees a price increase and can produce a product at the same cost, it will benefit from that situation for as long as possible. In some cases, however, producing more than one product leads to certain inefficiencies. For example, a company may have to pay overtime or require unscheduled deliveries, both of which make production more expensive. This could raise the price, while keeping the profit margin at previous levels.
In economics, the law of supply is often notated with what is known as a supply curve, although typically the pattern is a straight line extending upwards from left to right. On the x-axis, or horizontal line, is quantity. On the y-axis, or vertical line, is the line for price. Typically, the model is shown for general reference only, with no products, prices or supply quantities mentioned in the chart.
There is a close association between the laws of supply and demand because the two work hand in hand. As supply increases with price, demand will eventually decrease. Eventually, this will lead to a drop in prices as companies attempt to get rid of excess inventory. Often, the two lines are shown on the same graph and jointly referred to as the law of supply and demand, even though they are two separate laws. Generally, supply and demand are two opposing forces that work against each other until supply and demand come into equilibrium.
Since the law of supply indirectly suggests that profit maximization encourages a company to produce more, many see this law as a way to stimulate economies during times of recession. These individuals subscribe to what is known as the supply theory. They often cite this theory as a reason to lower income and other corporate taxes in an effort to stimulate the private sector and encourage economic growth.
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