AP® Microeconomics · Unit 2 · Topic 2.2
The Law of Supply
The law of supply says that as price rises, sellers offer more of a good, because higher prices make production more profitable and cover the rising cost of making extra units.
A seller only makes another unit if the price covers the cost of making it. Early units are cheap to produce, but as a firm pushes output higher it needs more workers, more overtime, more hours on aging equipment, so each additional unit costs more than the last. Marginal cost climbs. A higher market price makes it worth paying that rising cost, so sellers choose to supply more. That is the whole logic of the law of supply: price and quantity supplied move together.
A supply schedule is just a table pairing prices with the quantity sellers offer at each one. Plot those pairs on a graph with price on the vertical axis and quantity on the horizontal axis, connect them, and you get the supply curve, sloping upward left to right. A supply equation like Qs = 5P - 10 is the same information written as a formula: plug in a price, get quantity supplied. At P = 3, Qs = 5(3) - 10 = 5. At P = 6, Qs = 20. At P = 9, Qs = 35. Each 3 dollar increase in price raises quantity by 15 units here, since the slope of 5 is constant along this line.
Market supply adds up every firm's individual supply at each price. If Firm 1 supplies Qs1 = 4P and Firm 2 supplies Qs2 = 3P - 6, market supply is Qs1 + Qs2 = 7P - 6, found by summing quantities at the same price, not by averaging prices. This horizontal summing is exactly how individual demand curves become market demand, and it sets up the next step: putting supply and demand together to find the equilibrium price and quantity where the two curves cross.
Key terms
- Law of supply
- The principle that quantity supplied rises as price rises, holding other factors constant.
- Supply schedule
- A table listing the quantity sellers are willing to supply at each possible price.
- Supply curve
- The graph of a supply schedule, with price on the vertical axis and quantity supplied on the horizontal axis.
- Marginal cost
- The additional cost of producing one more unit of a good.
- Market supply
- The sum of every individual firm's quantity supplied at each price.
Watch it explained
- How it worksHow does a supply schedule become an upward sloping supply curve?
- Worked exampleFind quantity supplied at 3, 6, and 9 dollars when Qs = 5P - 10, and sketch the curve.
- How it worksWalk me through adding two firms' supply curves into one market supply curve.
- Ties togetherHow does rising marginal cost explain why a supply curve slopes upward?
Check yourself
End of topic.