What Is the Relationship Between Price and Quantity Supplied?

Price is the monetary value at which a good or service is exchanged in a market, representing the amount consumers pay. Quantity supplied refers to the specific amount of a good or service that producers are willing and able to offer for sale at a given price within a defined time period. This article explores the fundamental relationship between these two variables, explaining how price changes influence producers’ output decisions.

The Law of Supply

The Law of Supply establishes a direct, positive relationship between the price of a good or service and the quantity producers are willing to supply. Assuming all other factors remain constant, an increase in price leads to an increase in the quantity supplied, and a decrease in price results in a decrease in the quantity supplied. This principle holds true because higher prices create a greater incentive for producers to increase their output. Increased prices often mean enhanced profit margins, encouraging businesses to allocate more resources towards production.

When market prices rise, producers expand production, potentially by utilizing existing capacity more fully or investing in additional resources. For instance, if the market price for a product increases, a producer might pay workers overtime or acquire more raw materials to boost production volume. This decision is influenced by the calculation that revenue gained from selling additional units at a higher price will outweigh the costs of increased production.

The concept of increasing marginal costs of production also underpins the Law of Supply. As a producer increases output, the cost of producing each additional unit tends to rise. This occurs because, beyond a certain point, resources may become scarcer or less efficient, leading to diminishing returns. For example, a factory operating beyond its optimal capacity might incur higher expenses for maintenance or require more expensive labor to sustain increased production. A higher price is necessary to justify the increased expense of producing these additional units, making it profitable for firms to supply more only when prices are elevated enough to cover these rising marginal costs.

Representing the Relationship

The relationship between price and quantity supplied can be illustrated using a supply schedule and a supply curve. A supply schedule is a table that numerically presents the quantities of a good producers are willing to supply at various price points. For example, a schedule might show that at $10 per unit, 100 units are supplied, while at $15 per unit, 150 units are supplied, reflecting the direct relationship.

This numerical data from a supply schedule is then graphically translated into a supply curve. The supply curve plots price on the vertical (y) axis and quantity supplied on the horizontal (x) axis. The typical supply curve slopes upward from left to right, visually confirming the positive relationship between price and quantity supplied.

A change in the price of the good itself results in a “movement along” the existing supply curve. When the price increases, producers move to a higher point on the curve, indicating a greater quantity supplied. Conversely, a price decrease leads to a movement to a lower point on the curve, signifying a reduced quantity supplied. This movement along the curve is solely attributable to a change in the good’s own price, with all other factors affecting supply assumed to remain constant.

Distinguishing Changes in Quantity Supplied from Changes in Supply

It is important to differentiate between a change in quantity supplied and a change in supply, as these terms describe distinct economic phenomena. A “change in quantity supplied” refers exclusively to a movement along a stationary supply curve. This occurs only when the price of the good itself changes, leading producers to adjust their output along the existing supply relationship. For example, if the price of corn increases, corn farmers will supply more corn, moving to a new point on their current supply curve.

In contrast, a “change in supply” involves a shift of the entire supply curve, either to the left or to the right. This shift indicates that producers are willing to supply a different quantity at every possible price. These shifts are caused by factors other than the good’s own price, often referred to as “determinants of supply” or “supply shifters.” When supply increases, the curve shifts to the right, signifying that more is supplied at each price. When supply decreases, the curve shifts to the left, meaning less is supplied at each price.

Several non-price factors can cause the supply curve to shift:
Changes in input costs, such as raw materials, labor, or energy, directly impact profitability and thus supply. For instance, an increase in the cost of steel would reduce the supply of automobiles.
Technological advancements can shift supply by lowering production costs or increasing efficiency, allowing producers to supply more at the same price.
Government policies, including taxes, subsidies, or regulations, also play a role. A new tax on production increases costs and reduces supply, while a subsidy lowers costs and increases it.
Expectations about future prices can influence producers’ willingness to supply.
The number of sellers in the market affects overall supply.
Natural conditions like weather events can influence the ability of producers to supply goods.