Law of Supply

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Definition of the Law of Supply:

The law of supply is an economic concept asserting that as the price of a good or service increases, the quantity that producers are willing to supply of the good or service increases (assuming everything else is held constant). Conversely, when the price of a good or service decreases, producers supply less of the good or service. Price and quantity supplied are directly related.

Detailed Explanation:

Steve just opened his part-time handyman business. A friend refers him to his first potential customer! He calls him up and learns that the party is only willing to pay him $4.00 an hour! Steve declines knowing that he can get work elsewhere at a higher price. He posts some fliers in his community and soon has several inquiries. He decides to charge $10 an hour. At that rate he would be willing to work 15 hours per week. Soon his schedule is full, and he is turning people away. He decides to raise his hourly fee to $15 and work 20 hours per week. Word is out. Steve does great work at a reasonable price. Soon 20 hours are booked. One party calls him and offers to pay him $25 per hour for five hours per week. Steve can't turn down the added income and takes the job because of the higher price. A year passes and Steve is overwhelmed. He makes the big jump and enters the handyman business full-time. He is now willing to work 50 hours per week at $40 an hour. Steve's decisions demonstrate the law of supply. At higher prices, Steve is willing to devote more hours to his part-time business because he would earn a larger profit. The law of supply accurately describes the behavior of almost all businesses. At higher prices, a seller would be willing to offer a greater quantity than at lower prices because the seller would earn a larger profit. 

Dig Deeper With These Free Lessons:

Supply – The Producer's Perspective
Demand – The Consumer's Perspective
Changes in Supply – When Producer Costs Change
Price Elasticity of Supply – How Does a Producer Respond to a Price Change
Supply and Demand – Producers and Consumers Reach Agreement

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