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The Law of Supply
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SSC351--Improving Office Productivity Through TQM
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SSC351 Study Guide

Look around you and you will find many goods and services available for sale: From books to pencils, cars to trucks, burgers to pizza, bus services to medical services, and so on. These goods and services are produced by businesses and are bought by consumers to fulfill their needs and wants. The relationship between businesses and consumers is a simple one: consumers demand goods and services and businesses supply them. For the goods and services produced and sold, businesses earn profits. It is a healthy relationship where both parties win consumers get what they want and need, and businesses or firms get profits.

Supply is defined as the willingness and ability of producers to supply goods and services. Like demand, willingness and ability must coexist before supply can be present.

Willingness is the readiness of firms to produce, and ability is the capability or having the means to do so. Willingness to produce a particular good or service is always tied to the potential of making profits and this is further connected to demand of that good or service. Firms see profits in goods or services demanded by consumers and are always guided by this in determining their willingness or unwillingness to produce. The element of profits is always linked to price; therefore, firms always keep a watchful eye on the prices of goods in their production decisions. When the prices of goods and services are high they will produce more than when prices are low. The reason is simple: Higher prices bring higher profits. The ability of firms to produce depends on many factors, but the most important are the availability of factors of production and the capability of the firms to produce the goods or services efficiently. When they are able to produce at the least possible cost, they can remain competitive and continue to get profits.

Willingness to produce without ability to do so cannot create supply; and ability without willingness will not create supply either. You will notice there is no snow ski slopes on campus. Why? First there is no demand for one, so firms are not willing to produce. Even if there is a demand, firms do not have the ability to do so, at least not now with the available technology (There insufficient factors of production; plus its too difficult or costly). Is there supply of floppy disks on campus? Yes, there is. Firms are willing to produce (because there is demand and the price is right) and they have the ability to produce them.

Once the supply of a particular good or service is offered, the next thing to ask is "what is the quantity firms are willing and able to supply?" The number (or amount or quantity) of units firms will supply will depend on the price of the good or service. And since firms are always keeping a watchful eye on profits, they will produce more when prices are high and less when prices are low. At higher prices, firms see higher profit potential. The Law of Supply states that as price increases, the quantity supplied will also increase, and conversely when price falls, quantity supplied will also fall, ceteris paribus. This law is illustrated graphically as an upward sloping curve that shows a positive relationship between price and quantity supplied. It is important to note that the price of a particular good or service will affect its quantity supplied. The changes in quantity supplied are shown as movements along the supply curve. Later you will learn about changes in supply that shift the supply curve either to the left or right of its original position. It is also important to note that the supply curves only exist for goods or services supplied. There is no supply curve for goods or services that producers are unwilling and/or unable to supply.