The law of supply: the other things held constant, and why the supply curve slopes upward

The statement

The statement is the law of supply. If nothing else changes, a seller offers more of a commodity at a higher price and less at a lower price: price and quantity supplied move in the same direction. The phrase "other things remaining same" (ceteris paribus) matters because the quantity a seller offers depends on many things besides the commodity's own price. The law isolates the effect of price alone; when any of the other things changes, the whole supply curve shifts instead of the seller moving along it.

The other things held constant

1. Prices of inputs. Wages, raw materials, fuel and rent make up the cost of production. If diesel or fertiliser becomes dearer, a farmer offers less wheat at every price, so supply falls (the curve shifts left).
2. Technology. Better methods lower the cost of each unit. Drip irrigation or a new spinning frame lets a producer offer more at the same price, so supply rises (the curve shifts right).
3. Prices of related goods in production. A farmer who can grow either mustard or wheat on the same land will move towards whichever crop has become more profitable, cutting the supply of the other.
4. Number of sellers. More firms in the market raise market supply at every price; exits reduce it.
5. Expectations. If sellers expect higher prices next month, they may hold back stock now, so present supply falls.
6. Taxes and subsidies. A higher GST rate or excise duty raises the cost of supplying each unit and reduces supply; a production subsidy does the opposite.
7. Goals of the firm. A firm that aims at a larger market share rather than the highest profit may offer more at a given price.
8. Natural factors. Weather, floods and pests change the supply of farm goods regardless of price; a failed monsoon cuts the supply of pulses.

Why the supply curve slopes upward

1. Rising marginal cost. In the short run some inputs (land, machines) are fixed. As more of the variable input is added, the extra output from each additional unit falls (diminishing returns), so the cost of each extra unit of output rises. A firm supplies an extra unit only if the price covers its higher marginal cost, so a higher price is needed to call forth a larger quantity. Under perfect competition the supply curve is the marginal cost curve above minimum average variable cost.
2. Profit motive. At a higher price each unit earns more, so existing sellers find it worth stretching output, working extra shifts or releasing stock.
3. Higher-cost output becomes worth producing. At a higher price, units that cost more to make (overtime, older machines, extra shifts) now cover their cost, so each seller offers more.
4. Switching resources. A higher price for one good draws land, labour and capital away from other goods towards it.

Diagram. Price on the vertical axis and quantity supplied on the horizontal axis; the supply curve SS rises from left to right. At price OP₁ the quantity is OQ₁; at the higher price OP₂ the quantity is the larger OQ₂, a movement up along SS. A change in any of the other factors shifts SS to S′S′ instead.

Conclusion

The positive relation between price and quantity supplied holds only while input prices, technology, related prices, the number of sellers, expectations, taxes and natural conditions stay unchanged. The curve slopes upward mainly because marginal cost rises as output expands, and because higher prices both reward sellers and make higher-cost output worth producing.