Supply and the Law of Supply

A farmer deciding how much corn to plant next season looks at the price he'll get. At a low price, only his cheapest acres are worth planting. At a higher price, it pays to plant the rockier, less fertile fields too, even though each extra bushel costs more to grow. That's the law of supply: as price rises, quantity supplied rises, all else equal. The curve slopes upward because producers need a bigger payoff to justify the bigger cost of squeezing out more output.

The mechanism underneath is marginal cost, the cost of producing one more unit. For most producers, marginal cost climbs as output climbs, because easy, cheap resources get used first and only pricier ones are left. A producer will supply another unit only if the price covers that unit's marginal cost. Since marginal cost rises with quantity, it takes a rising price to call forth rising quantity, which is exactly the upward-sloping supply curve.

This sits next to demand but isn't a mirror image of it. Demand slopes down because buyers value extra units less and less. Supply slopes up for a completely different reason: producers face rising costs, not falling value. The two curves are independent relationships that happen to share the same price-quantity graph, and only together, at their intersection, do they pin down the market's actual price and quantity.