The Law of Supply

Supply joins demand as a component of fundamental analysis. Within the commodity markets, Supply relates to the behavior of firms in producing and selling a commodity. An understanding of the relationships affecting supply in the past can help with the development of future supply expectations and their impact upon market prices.

The law of supply can be approached in two ways. First is it representation of the total equal to production plus any carryover stocks. Second for supply describes the behavior of producers. Supply represents the amounts in which producers are willing to sell over a price for any given time period. Individually, a supplier might be willing to produce a commodity as long as the market price is equal to or greater than the cost of production. Total supply would be the quantities of a commodity that is brought to the market. Market supply is represented below by an upward curve with price vertically and quantity horizontally.

Increases in price can result in suppliers raising the quantity of a particular commodity brought to market, therefore the relationship between price and supply is said to be positive. Market supply is affected by other variables in addition to just price. Factors important when determining supply include the quantity of the investment firm producing the commodity, technology, the cost of inputs, the price of other commodities, which could be produced, and the weather.

With higher prices, the producers of commodities will receive higher profits. Higher profits result in the means to expand production, which increases supply. Increased supply will ultimately satisfy the existing demand and in order to sustain continued price increases any additional production must have new demand. Suppliers do not set prices as they choose; they may only raise prices if there is further consumer demand. The law of supply, as with demand, illustrates the function of the marketplace. The market doesn't care what costs incur to produce a commodity. Lower prices are the market's signal to suppliers that they have produced too much, or that it is something consumers do not want. Successful suppliers accept these fundamentals and produce for the market.

 Law of Demand                    Analysis Contents                     Supply Demand 

Information is believed to be reliable and is provided 'as is' without warranty.