Let’s say we’re wondering about setting up a chai tapri, you and I. It’s not the best, most original business idea in the world, but we should be able to earn some rate of return from our enterprise.
How much will be our rate of return? Well, difficult to say right now, but everyone will agree that it ultimately depends on the price at which we’re able to sell. So if we’re able to sell a cutting chai at, say 10 rupees, we are in business. But hey, if we realized that people are willing to buy at 20 rupees for a glass, even better. In that case, we would definitely want to get in the chai-making business.
And at 30 rupees, try and stop us from getting started, right? Except, at 30 rupees, it won’t be just us getting into the chai-making biz. Every Tom, Dick and Harry will be looking to set up a shop to sell chai.
Or, put another way, the supply of chai will go up, if the price per unit is going up. The higher the per unit price of a thing, the higher the supply of that thing. That’s the law of supply.
As with the law of demand, so also with the law of supply. It also depends on many other things – changing incomes, changing tastes and preferences, and the availability of other goods and services. Each of these things impacts the law of supply.
Things get really interesting, however, when you put the demand curve and the supply curve on the same diagram. This, the famous supply and demand framework, drives the very heart of microeconomic analysis, and that’s what we’re going to talk about next.