Law of supply
The Law of Supply is a fundamental principle in economics that describes the relationship between the price of a product and the quantity supplied by manufacturers. According to this law, as the price of a product increases, suppliers are incentivized to produce more of it to capitalize on higher potential profits. Conversely, if prices decrease, manufacturers tend to reduce production since the profit margins diminish. This principle operates under the assumption that, if the price drops below production costs, manufacturers may halt production entirely to avoid losses.
The dynamics of supply are also influenced by market demand; for a product to be successfully sold, there must be sufficient demand from consumers. For instance, the release of a new video game may create high demand, leading to a temporary shortage as eager customers are willing to pay a premium. However, as the market stabilizes and supply catches up, prices may adjust accordingly to attract more buyers. Factors such as competition, variable costs, and broader economic conditions also play critical roles in shaping supply decisions. While the Law of Supply provides a foundational understanding of market behavior, it is essential to recognize that real-world complexities can influence its application.
Law of supply
The law of supply is a basic concept of economics. It says that as the price of a product rises, manufacturers make more of it to take advantage of increased profits on each sale. The opposite is also true: if prices fall, companies make fewer units because they make less money on each sale. If the price drops below the cost of production, the manufacturer ceases production to avoid losing money.
Overview
When companies sell products or services, they do so with one goal: to make a profit. The quantity they supply is directly connected to the item's price. The higher the price, the more units the producer will try to make available.
While suppliers would love for the prices of their goods to remain high, a second element is always at work—demand. Unless someone is willing to pay the asking price, a product will not sell. The customer has options, such as going elsewhere, finding a substitute, or doing without. Unless the demand is strong, a product or service will not be offered for sale.
When demand is present, a market can be successful. For example, when a new version of a popular video game comes out and is in limited supply, demand is high. In economic terms, there is a shortage of the game. People line up outside stores, hoping to be among the first to own the game. They are willing to pay a high price to get it. However, after a few months, when supplies have been refreshed, most people who were willing to pay the high price have bought the game. Others may want it, but not at the original price. Suppose the price was $50. After sales slow to a certain point, the manufacturer lowers the price to $40. Once again sales are strong, as more people decide to buy the game. When that demand is filled, the manufacturer may lower the price again to win over another group of consumers. Or, supply and demand may be balanced, which means the market has reached equilibrium. If the quantity available exceeds the demand, there is a surplus. If the cost to make the game falls below the selling price, the game is no longer profitable and will probably be discontinued.
In the real world, other factors also affect supply. Competitors produce similar goods and services at various prices to vie for customers, whether they offer video games, cleaning services, or take-out pizzas. Variable costs, such as the price of labor or materials, change depending upon what else is happening in the economy. Other considerations such as the price of housing and gasoline affect consumers' ability to buy goods and services. While the law of supply works perfectly in theory, other factors always have to be considered.
Nancy Comstock
Bibliography
Arnold, Roger A. "Supply and Demand: Theory." Macroeconomics. Mason, Oh.: Cengage, 2011. Print.
Ball, Madeline K. and David Seidman. Supply and Demand. New York: Rosen, 2012. Print.
"The Law of Supply and Demand" What Is Economics? What Is Economics? Web. 9 Jul. 2014.
<http://www.whatiseconomics.org/>
Pinkasovitch, Arthur. "Introduction to Supply and Demand." Investopedia.com. 30 Jan. 2014. Web. 9 July 2014.
<http://www.investopedia.com/articles/economics/11/intro-supply-demand.asp>