Introduction

In this section, we begin to look at the law of supply, which indicates that a positive relationship exists between the price of a good or service and the quantity supplied of it.

After you have worked through this section of the learning unit, you should be able to:

  • describe the law of supply in words and with the aid of a chain of events

A crucial factor that influences how much of a good or service will be supplied to the market is the price of the good or service. Let us see how the price of fried chicken pieces influences the quantity supplied by a supplier of fried chicken pieces called Funky Chicken.

What do you think Funky Chicken would do if the price of fried chicken pieces were to increase?




Funky Chicken would probably supply a greater quantity because it would be profitable to do so.

As the price of fried chicken increases, Funky Chicken would plan to supply a larger quantity of fried chicken pieces. This is because by supplying a larger quantity at a higher price, the supplier is able to make a greater profit.

However, what happens if the price of fried chicken pieces decreases?

If the price of chicken pieces decreases, Funky Chicken will plan to supply a lower quantity. This is because by supplying a larger quantity at a lower price, it will make a loss (and may even eventually go out of business).

The law of supply can be therefore be explained as follows:

The higher the price of a good or service (all other things remaining the same), the higher the quantity supplied will be; and the lower the price of a good or service (all other things remaining the same), the lower the quantity supplied will be.

Using the symbol Px for the price of the product and the symbol Qs for the quantity supplied, the law of supply can also be written as follows:

↑ Px → ↑ Qs

An increase in the price of a product (P) causes an increase in the quantity supplied.

↓ Px → ↓ Qs

A decrease in the price of a product (P) causes a decrease in the quantity supplied.

This relationship between the price of a product and the quantity supplied is positive. A positive relationship indicates that if one variable goes up (in this case, the price of the product), the other variable will go up as well (in this case, the quantity supplied of a product). It also implies that if one variable goes down (in this case, the price of the product), the other variable will go down as well. The variables move in the same direction.

Watch the following video on the law of supply:

Activity

Do the following activity about the law of supply:

Choose the correct option in brackets:

Given that all other things (remain the same; change), if the price of a good or service increases, the quantity supplied will (decrease; increase), and if the price of a good or service decreases, the quantity supplied will (increase; decrease). This indicates that a (negative; positive) relationship exists between the price of the good and the quantity supplied.

Correct. It has to do with the ceteris paribus condition.

Think again.  It has to do with the ceteris paribus condition.

Think again.  If the price increases suppliers will supply a higher quantity.

Correct. If the price increases suppliers will indeed supply a higher quantity.

Think again.  If the price decreases suppliers will supply a lower quantity.

Correct.  If the price decreases suppliers will indeed supply a lower quantity.

Think again.  As the price increases the quantity supply increases and as the price decreases the quantity supply decreases.

Correct.  As the price increases the quantity supply increases and as the price decreases the quantity supply decreases. This indicates a positive relationship.

Which of the following represents the law of supply in symbols?






Think again.  This relates to the law of demand.

Correct.  It indicates as the price decrease the quantity supply decreases.

Think again.  The law of supply sates that the lower the price the lower the quantity supply.

Correct.  It indicates that as the price increases the quantity supply increases.

Think again. The law of supply states that the higher the price the higher the quantity supplied.