Law of Supply (Meaning and Explanation)

We explain what the law of supply is and what the supply curve is for. Also, the law of demand and what factors determine it.

What is the law of supply?

An economic and commercial principle that justifies the quantity available on the market of a given product (i.e., its supply), based on the requirement for it by consumers (i.e., its demand) and the price of the product.

This law is based on the concept of supply which, as we explained before, is nothing more than the total units available on the market of a certain product, at a certain moment in time. Consumers, thus, choose between the various options on offer when purchasing, and shape market conditions based on this selectivity.

For its part, the law of supply establishes that Given the higher value (price) of a product, its supply always tends to increase showing a directly proportional relationship.

This is true in reverse: the lower the price, the lower the supply of the product as well, and it is explained by the fact that the generation of a good or service costs a combination of capital and effort, so the sectors in charge of producing them require a minimum dividend. stable (or increasing) as an incentive to continue producing.

According to this, to determine the offer of a product, you must first know its price and possible economic return, along with its production expenses (labor, materials, energy) which must be deducted from the profit.

Supply curve

This is the name of the graph that illustrates the proportional relationship between the price of a good and its quantity that their producers make available to buyers in the market.

On a Cartesian plane (axis x and axis and) the figures are represented through a series of coordinates (each composed of a point on each axis) that, when unified, usually show an ascending curve (if the relationship is positive) or a descending curve (if it is negative).

The point of intersection in both Cartesian planes suggests that there is still a balance between supply and demand.

It is about one of the most commonly used tools in theoretical economic analysis (neoclassical), to try to predict the behavior of the market or determine the price range that depends on the quantity of products available to sell.

Law of demand

Very similar to the law of supply, this principle is interested in determining the existing demand for a product in its market based on the quantity that is for sale (offer) and the price at which it is sold.

In the case of the law of demand, the relationship between price and quantity is inversely proportional: as one goes up, the other goes down and vice versa.

Factors determining demand

Demand factors — As prices rise, supply increases and demand decreases.

The factors that commonly determine the demand for a good or service are:

The sale price When prices rise, supply increases and, in turn, the quantity demanded decreases, especially if there are cheaper alternatives.
Price of substitute goods When the price of goods that could be consumed instead of the good studied increases, so does the demand for the latter.
Price of complementary goods These are the goods that must be consumed along with the good studied for their correct functioning, such as gasoline to be able to use the car. If these goods increase in price, the demand for the main good will decrease, since the amount of money also increases.
Economic income level If consumers of a good must spend more money than usual paying for services or on other priority activities, their demand capacity for certain non-essential products will decrease.
Tastes and preferences As simple as that: people consume one product or another based on their personal preferences.
Shortage In times of scarcity of a product, its demand increases, since it is not known when the good will be consumed again and it is sought more insistently.
Inflation. When higher prices than the current ones are expected in an item, the immediate demand for said goods rises to the clouds, since everyone wants to buy it before the new price arrives; The same goes the other way around: if the price promises to fall, people prefer to wait and buy their goods for less money.