Question

Explain the law of supply. Why does the supply curve slope upward? How is the market supply curve derived from the supply curves of individual producers?

Short answer

The law of supply shows supplier’s behavior who moves the supply of a good in the same direction as the change in the price of a good when other factors are constant.

The supply curve is upward sloping to show that the suppliers increase their supply of a good when the price increases and vice versa.

A market supply curve is derived by horizontally adding up the individual supply curves of a good.

Step-by-step solution

Law of supply 

The Law of supply shows that the supply of a good is positively related to its price. For example, if TVs’ price increases in the market from $7,000 to $10,000, the suppliers will be encouraged to produce and supply more TV to earn greater profits. A price fall from $7,000 to $5,000 will discourage the supply. This is the law that governs the supply of a good.

Reason for an upward sloping supply curve

The supply curve slopes upward to show the same direction changes in the quantity supplied and price of a good. If the price of a good or service increases, the supply of that good or service will increase, and supply will decrease if the price decreases.

Derivation of the market supply curve

The market supply curve is determined or evaluated by horizontally summing up the individual supply curves at each level of price.

For example, two suppliers, say X and Y, are in the market, and their supply curves are given below. Adding up the quantity supplied at each price will give the market demand and market demand curve.

At $5 price, person X supplies 20 units of a good, and person Y supplies 30 units of a good. Thus, the total market supply is 50 units (=20+30) at this $5 price. The market supply curve is constructed ($S_X+S_Y$) by horizontally adding each seller’s supply curve ($S_{X}and{S}_Y$).