The Law of Supply

The Law of Supply states that as the price of a product rises, then the quantity supplied rises also. Quantity supplied refers to business's willingness to produce a good or service. An easy way of remembering this law is to think from the perspective of a business or firm; the higher the price per good, means that firms are willing to produce a larger quantity of goods in order to receive more profit. The opposite occurs when the price of goods falls.

The Effects in Changes in Price

When there is a change in the price of the good, then there will be a movement along the supply curve.

As shown by the model:

• An increase in price will increase the quantity supplied, as producers are willing to produce more goods if they are going to receive a higher price per good. This will cause the equilibrium to shift to point (Q1, P1) on the model, demonstrating an expansion of the market. 

• A decrease in price will decrease the quantity demanded, because, producers are less willing to produce goods for a lower price. This will cause the equilibrium to shift to point (Q1, P1) on the model, demonstrating a contraction of the market.