3 reasons why supply curve is upward sloping

The law of supply is the microeconomic law that states that, all other factors being equal, as the price of a good or service increases, the quantity of goods or services that suppliers offer will increase, and vice versa.

The law of supply says that as the price of an item goes up, suppliers will attempt to maximize their profits by increasing the number of items for sale.

• The law of supply says that a higher price will induce producers to supply a higher quantity to the market.
• Because businesses seek to increase revenue, when they expect to receive a higher price for something, they will produce more of it.
• Meanwhile, if prices fall, suppliers are disincentivized from producing as much.
• Supply in a market can be depicted as an upward-sloping supply curve that shows how the quantity supplied will respond to various prices over a period of time.
• Together with demand, it forms half of the law of supply and demand.

The chart below depicts the law of supply using a supply curve, which is upward sloping. A, B, and C are points on the supply curve. Each point on the curve reflects a direct correlation between quantity supplied (Q) and price (P). So, at point A, the quantity supplied will be Q1 and the price will be P1, and so on.

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The supply curve is upward sloping because, over time, suppliers can choose how much of their goods to produce and later bring to market. At any given point in time, however, the supply that sellers bring to market is fixed, and sellers simply face a decision to either sell or withhold their stock from a sale; consumer demand sets the price, and sellers can only charge what the market will bear.

If consumer demand rises over time, the price will rise, and suppliers can choose to devote new resources to production (or new suppliers can enter the market), which increases the quantity supplied. Demand ultimately sets the price in a competitive market; supplier response to the price they can expect to receive sets the quantity supplied.  

The law of supply is one of the most fundamental concepts in economics. It works with the law of demand to explain how market economies allocate resources and determine the prices of goods and services.

British economist Alfred Marshall (1842-1924), a specialist in microeconomics, contributed significantly to supply theory, especially in his pioneering use of the supply curve. He emphasized that the price and output of a good are determined by both supply and demand: The two curves are like scissor blades that intersect at equilibrium.

The law of supply summarizes the effect price changes have on producer behavior. For example, a business will make more video game systems if the price of those systems increases. The opposite is true if the price of video game systems decreases. The company might supply 1 million systems if the price is $200 each, but if the price increases to $300, they might supply 1.5 million systems.

To further illustrate this concept, consider how gas prices work. When the price of gasoline rises, it encourages profit-seeking firms to take several actions: expand exploration for oil reserves; drill for more oil; invest in more pipelines and oil tankers to bring the oil to plants where it can be refined into gasoline; build new oil refineries; purchase additional pipelines and trucks to ship the gasoline to gas stations; and open more gas stations or keep existing gas stations open longer hours.

The law of supply is so intuitive that you may not even be aware of all the examples around you:

• When college students learn that computer engineering jobs pay more than English professor jobs, the supply of students with majors in computer engineering will increase.
• When consumers start paying more for cupcakes than for donuts, bakeries will increase their output of cupcakes and reduce their output of donuts in order to increase their profits.
• When your employer pays time and a half for overtime, the number of hours you are willing to supply for work increases.

The law of supply summarizes the effect price changes have on a producer's behavior. For example, a business will make more of a good (such as TVs or cars) if the price of that product increases. So, if the price of TVs increases, TV producers are incentivized to produce more of them. Likewise, other companies may be induced to start producing TVs. This will increase the overall supply of televisions in the market. At some point, the abundant supply will tend to cause prices to moderate and fall.

There are five types of supply—market supply, short-term supply, long-term supply, joint supply, and composite supply. Meanwhile, there are two types of supply curves—individual supply curves and market supply curves. Individual supply curves graph the individual supply schedule, while market supply curves represent the market supply schedule.

Supply is influenced by prices and consumer demand. In addition, the number of suppliers available, the level of competition, the state of technology, and the presence of government support or restriction will play important roles. For certain products like agricultural commodities, supply is also impacted by things like weather and crop yields.

The law of demand is a fundamental principle of economics that states that at a higher price consumers will demand a lower quantity of a good, and vice-versa.

The law of supply and demand outlines the interaction between a buyer and a seller of a resource. Supply and demand says that sellers will supply less of a product or resource as price decreases, while buyers will buy more, and vice versa, until an equilibrium price and quantity is reached. It incorporates both the law of supply and the law of demand.

The supply curve is a graphic representation of the correlation between the cost of a good or service and the quantity supplied for a given period. In a typical illustration, the price will appear on the left vertical axis, while the quantity supplied will appear on the horizontal axis.

• On most supply curves, as the price of a good increases, the quantity of goods supplied also increases.
• Supply curves can often show if a commodity will experience a price increase or decrease based on demand, and vice versa.
• The supply curve is shallower (closer to horizontal) for products with more elastic supply and steeper (closer to vertical) for products with less elastic supply.
• The supply curve, along with the demand curve, are the key components of the law of supply and demand.

The supply curve will move upward from left to right, which expresses the law of supply: As the price of a given commodity increases, the quantity supplied increases (all else being equal).

Note that this formulation implies that price is the independent variable, and quantity the dependent variable. In most disciplines, the independent variable appears on the horizontal or x-axis, but economics is an exception to this rule.

If a factor besides price or quantity changes, a new supply curve needs to be drawn. For example, say that some new soybean farmers enter the market, clearing forests and increasing the amount of land devoted to soybean cultivation. In this scenario, more soybeans will be produced even if the price remains the same, meaning that the supply curve itself shifts to the right (S2) in the graph below. In other words, supply will increase.

Technology is a leading cause of supply curve shifts.

Other factors can shift the supply curve as well, such as a change in the price of production. If a drought causes water prices to spike, the curve will shift to the left (S3). If the price of a substitute—from the supplier's perspective—such as corn increases, farmers will shift to growing that instead, and the supply of soybeans will decrease (S3).

If a new technology, such as a pest-resistant seed, increases yields, the supply curve will shift right (S2). If the future price of soybeans is higher than the current price, the supply will temporarily shift to the left (S3), since producers have an incentive to wait to sell.

Should the price of soybeans rise, farmers will have an incentive to plant less corn and more soybeans, and the total quantity of soybeans on the market will increase. 

The degree to which rising prices translate into rising quantity is called supply elasticity or price elasticity of supply. If a 50% rise in soybean prices causes the number of soybeans produced to rise by 50%, the supply elasticity of soybeans is 1.

On the other hand, if a 50% rise in soybean prices only increases the quantity supplied by 10 percent, the supply elasticity is 0.2. The supply curve is shallower (closer to horizontal) for products with more elastic supply and steeper (closer to vertical) for products with less elastic supply.

The terminology surrounding supply can be confusing. "Quantity" or "quantity supplied" refers to the amount of the good or service, such as tons of soybeans, bushels of tomatoes, available hotel rooms, or hours of labor. In everyday usage, this might be called the "supply," but in economic theory, "supply" refers to the curve shown above, denoting the relationship between quantity supplied and price per unit.

Other factors can also cause changes in the supply curve, such as technology. Any advances that increase production and make it more efficient can cause a shift to the right in the supply curve. Similarly, market expectations and the number of sellers (or competition) can affect the curve as well.

The law of supply and demand is an economics concept whereby the price of a good will reach an equilibrium based on the amount of that good available (the supply) and the amount that customers want (the demand).

Image by Julie Bang © Investopedia 2020 

The demand curve is the complement to the supply curve, in the law of supply and demand. Unlike the supply curve, the demand curve is downward-sloping, since the higher the price of a good, the less demand there will be for it, all else equal.

The supply curve can shift based on several factors including changes in production costs (e.g., raw materials and labor costs), technological progress, the level of competition and number of sellers/producers, and the regulatory & tax environment.

Demand is influenced by the amount of disposable income available to consumers along with consumer preferences. The presence of viable substitutes or alternatives can also shift the demand curve.