Economics: The Law of Supply
We already talked about the Law of Demand. Now, we are going to talk about the Law of Supply. But first, let us review a term that we learned about when we discussed the Law of Demand. That term is ceteris paribus, or “all things being equal.” When we talk about a law in economics, and about how that law works, we always assume that there is nothing else outside the law that changes it. This is the starting point of understanding economics.
For the Law of Supply, it is almost the reverse of the Law of Demand. Remember, in the Law of Demand, the more expensive something is, the less people will buy it. For the Law of Supply, the more expensive something is, the more people will sell it, because they will earn more money.
Let us go back to the example about the bottle of water. For the Law of Demand, the more expensive the bottle of water was, the less people wanted to buy it. When the price was already 50 dollars a bottle, only the dying-of-thirst students would pay that much for it. Why? Because the bottle of water was something they needed right away, or they might die.
In the Law of Supply, when the price of the bottle of water was only 5 cents, only one or two sellers, or vendors, would be selling the water to the students. Why? Because no other vendor is interested is getting so little every time he sells a bottle.
When the price of the bottle of water was 2 dollars, more vendors would be interested in selling, because they will get more every time they sell. So, there are now 7 vendors selling water to students. But when the price of the bottle of water becomes 50 dollars, there are now 20 vendors selling water to the students. Why? Because they earn even more for every bottle that they sell.
The Law of Supply works because of the vendors’ “want,” which is to earn. This “want” is what draws more and more vendors to selling water, the higher the price goes. The higher the price is, the more the vendor can earn. The next article will describe why that is.
Ceteris paribus for this law means two things. First, it means that we assume that there are enough dying-of-thirst students for the water vendors to sell to. If there were not too many, there would still be less vendors. Second, it means we assume that all the vendors are selling only water to the boys, and no one decided to sell soda, iced tea, or any other kind of drink at a lower price.
To repeat, the Law of Supply means that the more expensive something is, the more vendors want to sell it. It works the other way around as well. The cheaper something is, the less vendors want to sell it. Why? Because they want to earn money, and they earn more if what they are selling is more expensive. In ceteris paribus, we are only looking at why vendors want to sell the bottled water, which is because it is more expensive. We assume that there are enough buyers for them to sell to.