What is the law of supply?

What Does Law of the Offer Mean

We explain what the law of supply is and what the supply curve is for. In addition, the law of demand and what factors determine it.

The law of supply justifies the quantity of a product on the market.

What is the law of supply?

It is known as the law of supply to an economic and commercial principle that justifies the quantity available in the market of a given product (that is, its offer ), based on the requirement of it by consumers (that is, its demand ) and the price of the product .

 

This law is based on the concept of supply which, as we explained before, is no more than the total number of units available in the market of a certain product, at a certain point in time. The consumers thus choose between various options to offer when buying, and molded from such selectivity market conditions.

For its part, the law of supply establishes that in the face of the highest value (price) of a product, its supply always tends to increase , showing a directly proportional relationship.

This is true in reverse: the lower the price, the lower the supply of the product as well, and it is explained that the generation of a good or service costs a combination of capital and efforts, so the sectors in charge of producing them require a minimum dividend. stable (or increasing) as an incentive to continue producing.

Accordingly, to determine the offer of a product, its price and possible economic return must first be known, along with its production expenses ( labor , materials, energy ) that must be discounted from the profit .

Thus, then, the supply of a product can lower the price (when it is massive) or make it more expensive (when it is scarce) the price of a good or service.

Thus: if the sale price of a product is increased, it will commonly increase its offer in the market as well, and vice versa.

See also: Free trade

Supply curve

The supply curve tries to predict the behavior of the market.

This is the name of the graph that illustrates the proportional relationship between the price of a good and the quantity of it that its producers make available to buyers in the market.

On a Cartesian plane ( x -axis and y-axis ) the figures are represented through a series of coordinates (each composed of a point on each axis) which, when unified, usually show an ascending curve (if the relationship is positive) or descending (if negative).

The point of intersection in both Cartesian planes suggests that there is still an equilibrium between supply and demand .

It is one of the most commonly used tools in theoretical economic analysis (neoclassical), to try to predict market behavior or determine the price range based on the amount of products available to sell.

Law of demand

Very similar to the law of supply, this principle is interested in determining the existing demand for a product in its market , based on the quantity it is for sale (supply) and the price at which it is sold.

In the case of the law of demand, the relationship between price and quantity is inversely proportional: as I go up one, the other goes down and vice versa.

Contrary to the law of supply, this law does not take into account the production process , but the economic conditions of the buyer: their preferences, their available capital , the presence (or not) of supplementary goods (consumer alternatives).

Factors determining demand

As prices rise, supply increases and demand decreases.

The factors that commonly determine the demand for a good or service are:

  • The sale price. When prices rise, supply increases and, on the other hand, the quantity demanded decreases, especially if there are cheaper alternatives.
  • Price of substitute goods. When the price of the goods that could be consumed instead of the good studied increases, so does the demand for the latter.
  • Price of complementary goods. These are the goods that must be consumed together with the well studied for its correct operation, such as gasoline to be able to use the car. If these goods increase in price, the demand for the main good will decrease, since the quantity of money also increases.
  • Economic income level. If consumers of a good must spend more money than usual paying for services or other priority activities, their ability to demand certain non-essential products will decrease.
  • Tastes and preferences. As simple as that: people consume one product or another based on their personal preferences.
  • Shortage. In moments of scarcity of a product, its demand increases, since it is not known when the good will be able to be consumed again and it is sought more insistently.
  • Inflation. When higher prices are expected than the current ones in an item, the immediate demand for these goods rises through the roof, since everyone wants to buy it before the new price arrives; the same in reverse: if the price promises to fall, people prefer to wait and buy their goods for less money.

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