Importance of Law of supply
- Supply responds to change in prices differently for different goods, depending on their elasticity or inelasticity. If goods are elastic then a modest change in price leads to a large change in the quantity supplied. If goods are inelastic, then a change in price leads to relatively no response to the quantity supplied. An example of elastic good would be soft drinks, whereas an example of an inelastic service would be physicians’ services. Producers will be interested to supply more inelastic goods such as gas because they will earn more profit from it.
- Law of supply is an economic principal that states there is a direct relationship between the prices of a good and how much of the goods a producer is ready to supply.
- As the price of a good increase, suppliers will want to supply more of it. However, as the price of a good decrease, suppliers will not want supply as much of it. For producers want to produce a good, the profit must be greater than the opportunity cost of production.
- Entrepreneurs enter into business ventures with the intention of making a profit. A profit occurs when the revenues from the goods of a producer supplies exceeds the opportunity cost of their production. However, consumers must pay for the goods at the price offered for them. Therefore a consumer has to pay for the good higher than its cost of production. So supplier’s profits are dependent on consumer demands and values. However when suppliers do not earn enough revenue to cover the cost of production of the good, they face a loss. Losses occur whenever consumers pay for a good less than the alternative goods which could be produced with the same resources.