The Law of Supply is wrong?


by Kyoma
Tags: supply
Kyoma
Kyoma is offline
#1
Mar6-12, 08:23 AM
P: 99
Economics:

The Law of supply states that there is a direct relationship between price and quantity supplied, ceteris paribus. That is to say when all other variables are held constant, when price increases, quantity supplied also increases.

But from my common knowledge, when quantity supplied increases (there is an increase in supply), prices will go down. This can also be shown on the supply curve graph.

Isn't the Law contradicting itself??

I'm a beginner in economics.. have not learned elasticity etc. so, I'm not sure. :(
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Pyrrhus
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#2
Mar6-12, 06:31 PM
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This is a partial equilibrium assumption.

Basically, if you draw Price, and the quantity, and you draw a straight line with positive slope, then you have your supply function.

Thus it is rather easy to see when one increase the other increases.

Of course, this is a very trivial economic model. The correct way is to model the simultaneity of Demand function, and Supply function. In actually, research both functions are estimated as Simultaneous equations in an econometric model.
John Creighto
John Creighto is offline
#3
Mar15-12, 02:02 PM
P: 813
Quote Quote by Kyoma View Post
Economics:

The Law of supply states that there is a direct relationship between price and quantity supplied, ceteris paribus. That is to say when all other variables are held constant, when price increases, quantity supplied also increases.

But from my common knowledge, when quantity supplied increases (there is an increase in supply), prices will go down. This can also be shown on the supply curve graph.

Isn't the Law contradicting itself??

I'm a beginner in economics.. have not learned elasticity etc. so, I'm not sure. :(
That would be true if there are economics of scale. If your production only depends on variable cost then there is generally a diminishing marginal return on these inputs to production. For each new unit the producer produces, the producer must demand that marginal cost equals marginal revenue. However, in the case that marginal return is not diminishing then the supply graph could be horizontal or even downward slopping. Prices though might not fall because of supply reasons, they could fall instead based on demand reasons.


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