Law of Supply

What Is Law of Supply?

The law of supply is the rule that, holding everything else constant, the quantity of a good producers are willing to offer moves in the same direction as its price: a higher price draws out a larger quantity supplied, and a lower price a smaller one. This positive relationship is why the supply curve slopes upward. A change in the good's own price causes a movement along the supply curve, whereas non-price factors, such as input costs, technology, taxes, expectations, and the number of firms, shift the entire curve. Higher prices reward production, encouraging firms to expand output and new firms to enter.

Why It Matters

The law of supply is the producer-side counterpart to the law of demand, and together they determine market equilibrium. It explains why rising prices coax more output from an industry and why new firms enter when profits are attractive, shifting the market supply curve right. Analysts rely on it to predict how producers respond to price signals, which is the basis for the price elasticity of supply. The law also underlies producer surplus: because the upward-sloping supply curve reflects rising marginal costs, producers earn a surplus on every unit sold above the minimum price they would have accepted. Recognizing the difference between a movement along supply and a shift of it prevents common analytical mistakes.