Why Does Quantity Supplied Increase When Price Increases?
The quantity of a particular good supplied in a market increases as price goes up because suppliers have an increased interest in producing goods to generate higher amounts of revenue. This is a basic principle of the law of supply and demand.
The relationship between price and quantity supplied is shown on an economic graph known as the supply curve. The supply curve shows the relationship between rising and falling prices, and rising and falling quantities supplied. It assumes that other factors, such as production capabilities and technological advances, remain constant.
When businesses or consumers are willing to pay more money for a given product, suppliers have a chance to earn more profit on each sale or to increase sales volume. If a good that costs $8 to make gets a bump from $14 to $16 in market price, the provider has a chance to gain $2 more in revenue and profit on each sale. Each provider in the industry recognizes this opportunity and feels compelled to ramp up volume of the item. Eventually, if the level of supply increases too dramatically, a surplus results. A surplus is when supply exceeds demand. A surplus ultimately causes prices to drop until the excess supply is reduced and supply once again reaches a natural equilibrium.