Glossary term
Law of Supply
The law of supply says that, all else equal, producers are generally willing to supply more of a good or service when its price rises.
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What Is the Law of Supply?
The law of supply says that, all else equal, producers are generally willing to supply more of a good or service when its price rises. Higher prices can make production more profitable, which gives sellers an incentive to produce or offer more.
The phrase “all else equal” matters. Costs, technology, regulation, taxes, weather, labor availability, supply chains, and expectations can all shift supply even if price has not changed.
Key Takeaways
- The law of supply describes the relationship between price and quantity supplied.
- Higher prices usually encourage more supply, all else equal.
- Lower prices usually discourage supply, all else equal.
- Production costs, technology, regulation, and resource availability can shift supply.
- Supply works together with demand to influence market prices and quantities.
How the Law of Supply Works
If a product's price rises while production costs stay the same, producers may be more willing to make and sell it. Existing producers may increase output, and new producers may enter the market.
If the price falls, some production may become less profitable. Producers may cut output, delay expansion, or leave the market entirely.
Supply Versus Demand
Concept | Basic idea |
|---|---|
Law of supply | Higher prices tend to increase quantity supplied |
Law of demand | Higher prices tend to reduce quantity demanded |
Market equilibrium | Point where supply and demand balance at a price and quantity |
What Can Shift Supply?
Supply can shift when input costs change, technology improves, taxes or subsidies change, regulations change, producers expect future prices to change, or production capacity expands or contracts.
That is why prices do not explain everything by themselves. A business may want to supply more at a higher price but be unable to do so if labor, materials, financing, or capacity are constrained.
The Bottom Line
The law of supply explains why producers usually offer more when prices rise and less when prices fall, assuming other factors stay the same. It is one side of the supply-and-demand framework that helps explain market prices.