What is the law of supply?

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

  1. 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 particular product (that is, its offer ), based on the requirement of the same by consumers (that is, its demand ) and the price of the product.

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

On the other hand, the law of supply establishes that given the higher value (price) of a product, its offer always tends to increase , showing a directly proportional relationship.

This is true in reverse: at a lower price, lower product offer as well, and it is explained that the generation of a good or service costs a combination of capital and effort, so the sectors responsible for 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, together with its production costs (labor, materials, energy) that must be discounted from the gain .

Thus, then, the offer of a product can reduce (when it is massive) or increase (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.

  1. Offer Curve

Supply curve
The supply curve tries to predict market behavior.

This is the name of the graph that illustrates the proportional relationship between the price of a good and the amount of the same 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) that when unified, usually show an upward curve (if the relationship is positive) or descending (if negative).

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

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

  1. Demand Law

Very similar to the law of supply, this principle is interested in determining the existing demand for a product in your market , from the quantity that is for sale (offer) 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 climb one, the other goes down and vice versa.

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

  1. Factors that determine demand

Demand factors
As prices rise, supply increases and demand decreases.

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

  • The selling price . When prices rise, the supply increases and, instead, the quantity demanded decreases, especially if there are cheaper alternatives.
  • Price of substitute goods . When the price of 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 proper functioning, such as gasoline to be able to use the car. If these goods increase in price, the demand for the main asset will decrease, as the amount of money also increases.
  • Level of economic income . If consumers of a good must spend more money than ordinary 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.
  • Scarcity . In the moments of shortage of a product, its demand increases, since it is not known when the good will be able to be consumed again and it is searched with more insistence.
  • Inflation . When higher prices than current prices are expected in one item, the immediate demand for such goods rises to the clouds, since everyone wants to buy it before the new price arrives; The same is the other way around: if the price promises to fall, people prefer to wait and buy their goods for less money.

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