According to the law of supply, what is the relationship between price and quantity supplied

Law of supply of goods and services speaks from supplier / seller point of view

Like law of demand which states a relation between the price and the quantity demanded for a good or service, law of supply states a relation between price and quantity supplied. Supply, like demand, is a flow concept. As Lipsey has put it: "Supply is a desired flow: how much firms are willing to sell per (unit) period of time not how much they actually sell." Law of supply refers to the amount of a goods or services that producers are willing and able to offer for sale at each possible price per unit. The law of supply simply states that, as the price of a good or service rises, the quantity supplied (i.e., offered for sale) also rises.

Definitions

— In the words of Dooley. "The law of supply states that other things being equal the higher the price, the greater the quantity supplied or the lower the price, the smaller the quantity supplied."

• Supply Analysis

• Law of Supply

• Determinants of supply

• Supply Function

• Elasticity of supply

• The Model of Supply and Demand (equilibrium)

— According to Lipsey, "The law of supply states that other things being equal, the quantity of any commodity that firms will produce and offer for sale is positively related to the commodity's own price, rising when price rises and falling when price falls."

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

Table of supply schedule

The relationship between price and quantity supplied is usually a direct and positive relationship. A rise in price is associated with a rise in quantity supplied by the seller in the market.

Graphical presentation of supply schedule

The Supply schedule is presented in the graphical form, wherein the quantity Supplied is shown on X axis and the price of the oranges are shown on Y axis.

The supply of goods is at 100 when the price of the goods is at 10/-, similarly the supply is increased from 100 to 250 by the producer / seller when the price is increased from 10 to 13/-. As the price of the goods is increased the supply of goods is also increased and the price is decreased the supply for goods is also decreased by the seller, which is because of Law of Supply effect on goods and services, as there is always direct relation in between price of the goods and services and Supply for the goods and services. The supply curve always moves upwards from left to right.

WHY DOES PRICE INCREASES WHEN THERE IS A SHORTAGE OF GOODS?

In below table , there is a shortage of goods (150-50 =100 units) at a price of $5 and Quantity demanded (Qd) (150 units) is greater than quantity supplied (Qs) (50 units), buyers will not be able to buy all they had hoped to buy at $5. Some buyers will bid up the price to get sellers to sell to them instead of selling goods to other buyers. Some sellers, seeing buyers more demand for the goods, sellers will realize that they can raise the price of the goods that they have for sale. Hence the higher prices will also make the sellers to add (production) output. Thus, there is a tendency for price and output to rise until equilibrium is achieved.

The law of supply and demand is perhaps one of the most fundamental concepts and it is the backbone of a market economy.

Demand refers to the quantity of a product or service that buyers want.

The quantity demanded of a product is the quantity that people are willing to buy at a given price; the relationship between the price and the quantity demanded is known as the demand ratio.

Supply represents how much the market can supply.

The quantity supplied of a given good is the quantity that producers are willing to supply when they receive a given price.

The correlation between the price and the quantity of a good or service supplied to the market is known as the supply ratio.

Price, therefore, is a reflection of supply and demand.

The relationship between demand and supply underlies the forces behind the allocation of resources.

In theories of market economics, the theory of demand and supply will allocate resources in the most efficient way possible.

How? Let us take a closer look at the law of demand and the law of supply.

The law of demand states that, all other things being equal, the higher the price of a good, the less people will demand that good.

In other words, the higher the price, the smaller the quantity demanded.

The quantity of a good that buyers purchase at a higher price is less because as the price of a good rises, so does the opportunity cost of buying that good.

As a result, people will naturally avoid buying a good that forces them to forego consumption of something else they value more.

The graph below shows that the curve is downward sloping:

A, B and C are points on the demand curve. Each point on the curve reflects a direct correlation between quantity demanded (Q) and price (P).

Thus, at point A, the quantity demanded will be Q1 and the price will be P1, and so on.

The demand ratio curve illustrates the negative relationship between price and quantity demanded.

The higher the price of a good, the lower the quantity demanded (A), and the lower the price, the more the good will be demanded (C).

The law of supply

Like the law of demand, the law of supply shows the quantities that will be sold at a given price.

But unlike the law of demand, the supply ratio shows an upward slope.

This means that the higher the price, the higher the quantity supplied.

Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.

A, B and C are points on the supply curve.

Each point on the curve reflects a direct correlation between quantity supplied (Q) and price (P).

At point B, the quantity supplied will be Q2 and the price will be P2, and so on.

Time and supply

However, unlike the demand relationship, the supply relationship is a factor of time.

It is important for supply because suppliers must, but cannot always, react quickly to a change in demand or price.

Therefore, it is important to try to determine whether a price change caused by demand will be temporary or permanent.

Say there is a sudden increase in demand and price for umbrellas in an unexpected rainy season; suppliers can simply accommodate the demand by using their production equipment more intensively.

However, if there is a climate change and the population needs umbrellas all year round, the change in demand and price is expected to be long-term; suppliers will have to change their equipment and production facilities to meet long-term demand levels.

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