Introduction to Supply

Economists use supply to determine the quantity of goods or services that should be made available to the market for the highest return on profit. In other words, supply is a term used in economics to demonstrate an amount of available goods or services. Entrepreneurs use supply to gauge whether they should provide more or less of a given good or service to market. For example, when people start to increase their desire (demand) for a product then the savvy entrepreneur will meet that desire (demand) by increasing supply. The increased supply sells and the entrepreneur makes more money. On the other hand however, if the desire (demand) for a good or service decreases then the entrepreneur will reduce his or her levels of supply so as to avoid the risk of losing money in the market.

The law of supply states that when market price increases then so will supply; whereas when market price decreases so will supply. (Of course this law is operating under the ceteris paribus principle that was discussed earlier in the course). When applied to an example, the law of supply becomes more evident. If consumers are willing to pay higher prices for a product then businesses seek to capture that opportunity by increasing their supply. For example, if students started to buy a certain type of soda because of its popularity, the store owner will order more of that type of soda to meet the increased demand of the customers, thus increasing profit. The store owner may also increase the price since the desire (demand) to purchase this soda is high. This principle reacts differently when the same soda becomes less popular. When the business person notices that consumers are no longer interested in that soda, he or she then drops the quantity supplied and decreases the price to avoid overstocking and a loss in profit. Demand and supply are directly reliant upon each other in an economic system.