The Law of Supply and the Supply Curve

Supply refers to the quantity of goods and services that firms are willing and able to provide/sell in a time period.

Law of Supply (AO2)

"The law of supply states that there is a positive relationship between quantity supplied and price, ceteris paribus."

(HL) Assumptions Underlying the Law of Supply (AO2)

1. The law of diminishing marginal returns: As the factors of production increase to produce more supply, the added return of an additional resource diminishes. Hence, firms are only willing to supply more at higher prices.

   • 1. Let's say you have a restaurant with 1 chef. When you hire one more chef, productive capacity is doubled. But if you were to add 100 chefs, each additional chef is contributing less and less, as your restaurant is still bound by its kitchen size in the short run. In the long run, you have time to upgrade your kitchen size so all chefs are working optimally.

2. Increasing marginal costs: Owing to the law of diminishing marginal returns, the added productive gain of employing more workers decreases, but their costs do not, hence the cost of each new resource will increase. Hence, firms are only willing to supply more at higher prices.

   • 1. In the chef scenario, each additional chef is contributing less and less, but they still need to be paid the same wages. This means that each new chef costs more to your restaurant than the one before.

The Supply Curve (AO4)

Individual vs. Market Supply (AO2)

The market supply refers to the combined supply by every individual firm in a market at a price level. 

Example: If firms in Germany are willing and able to sell 10,000 Audis, 15,000 Mercedeses, and 8,000 BMWs in a year, then the market supply for "overpriced cars for inflated egos" is 33,000 per year.