In microeconomic theory, the law of supply expresses a relationship between products and prices. According to the law, the increase in a price of a product means that the quantity of a product also increases. (Arnold, 68) From the reverse perspective, therefore, the decrease in the price of the product means that the quantity of the product will also decrease. (Arnold, 68) The law of supply accordingly defines production strategies. In so far as a product is now being sold at a higher price, a company will attempt to produce more of these items, so as to take advantage of the higher price and increase profits.
Hence, the law of supply entails that quantity of products and the price of these same products have a definable and consistent relation. If this were not the case, the law of supply would be limited in its effectiveness with regard to explaining microeconomic phenomena. This, at the same time, of course does not mean that there are not exceptions to the law of supply. For example, products which for various reasons have limited availability are unaffected by this law. Arnold thus gives the example of the famous violin maker Stradivari: although he died almost three hundred years ago and the price of Stradivarius violins continue to grow, the supply of the Stradivarius product is obviously unaffected by the increasing prices. (Arnold, 68) Another example is that of limited tickets to an event: a sold-out concert and an increase of prices for the concert do not mean that more tickets shall be produced, in so far as seating is limited. (Arnold, 68)
Accordingly, the law of supply’s effectivity in explaining economic phenomena must be limited to specific microeconomic contexts. Hence, the law helps explain why companies produce a certain quantity of goods: the investment associated with production must ultimately be justified by higher prices, which provide the very “incentive” for production. (Tucker, 57)
- Arnold, Roger A. Economics. Mason, OH: Cengage, 2013.
- Tucker, Irvin. Survey of Economics. Mason, OH: Cengage, 2010.