# How is the Law of Supply Related to Opportunity Cost?

The law of supply and the concept of opportunity cost are two important ideas in economics that help explain how producers make decisions about what to produce and how much to produce. In this article, we will explore the relationship between these two concepts and how they affect the behavior of suppliers in a market.

## What is the Law of Supply?

The law of supply is a microeconomic principle that states that, all other factors being equal, as the price of a good or service increases, the quantity of goods or services that suppliers offer will increase, and vice versa. This means that suppliers are willing and able to produce more of a good or service when they can sell it at a higher price, and less of it when they can sell it at a lower price.

The law of supply can be illustrated by using a supply curve, which is a graph that shows the relationship between the price and the quantity supplied of a good or service. A supply curve is usually upward sloping, meaning that as the price increases, the quantity supplied also increases. The following graph shows an example of a supply curve for gasoline:

The supply curve shows that at a price of \$1.00 per gallon, suppliers are willing to produce 500 million gallons of gasoline. At a price of \$2.00 per gallon, suppliers are willing to produce 700 million gallons of gasoline. The higher price provides an incentive for suppliers to increase their production and earn more revenue.

## What is Opportunity Cost?

Opportunity cost is another microeconomic concept that refers to the value of the next best alternative that is forgone as a result of making a decision. In other words, opportunity cost is what you give up when you choose one option over another. For example, if you have \$10 and you can either buy a pizza or a book, the opportunity cost of buying the pizza is the book that you could have bought instead.

Opportunity cost is important because it helps us measure the true cost of our choices, not just in terms of money, but also in terms of time, effort, and satisfaction. By considering opportunity cost, we can make more rational and efficient decisions that maximize our well-being.

The law of supply and opportunity cost are related because they both influence how suppliers allocate their scarce resources among different production possibilities. When suppliers decide how much of a good or service to produce, they face trade-offs between producing more of one good or service and producing less of another. The opportunity cost of producing more of one good or service is the amount of another good or service that could have been produced instead.

For example, suppose a farmer has 100 acres of land that he can use to grow either wheat or corn. If he devotes all his land to wheat, he can produce 10,000 bushels of wheat. If he devotes all his land to corn, he can produce 8,000 bushels of corn. If he splits his land equally between wheat and corn, he can produce 5,000 bushels of wheat and 4,000 bushels of corn.

The following table shows the different production possibilities for the farmer:

The table shows that there is a trade-off between producing wheat and producing corn. The more wheat the farmer produces, the less corn he can produce, and vice versa. The opportunity cost of producing one more bushel of wheat is the amount of corn that has to be given up. For example, if the farmer produces 9,000 bushels of wheat instead of 10,000 bushels, he can produce 1,000 bushels more corn. Therefore, the opportunity cost of producing one more bushel of wheat is 1/1000 = 0.001 bushels of corn.

Similarly, the opportunity cost of producing one more bushel of corn is the amount of wheat that has to be given up. For example, if the farmer produces 9,000 bushels of corn instead of 10,000 bushels, he can produce 1,000 bushels more wheat. Therefore, the opportunity cost of producing one more bushel of corn is 1/1000 = 0.001 bushels of wheat.

The law of supply states that the quantity supplied of a good or service depends on the price of that good or service. The higher the price, the more suppliers are willing and able to produce. The lower the price, the less suppliers are willing and able to produce. This is because the price affects the opportunity cost of producing that good or service.

When the price of a good or service increases, the opportunity cost of producing that good or service decreases. This is because suppliers can earn more revenue by producing that good or service, and they have to give up less of other goods or services that they could have produced instead. Therefore, an increase in price provides an incentive for suppliers to increase their production and supply more of that good or service.

When the price of a good or service decreases, the opportunity cost of producing that good or service increases. This is because suppliers can earn less revenue by producing that good or service, and they have to give up more of other goods or services that they could have produced instead. Therefore, a decrease in price provides a disincentive for suppliers to decrease their production and supply less of that good or service.

For example, suppose the price of wheat increases from \$5 per bushel to \$6 per bushel. This means that the farmer can earn more revenue by producing wheat, and he has to give up less corn that he could have produced instead. Therefore, the opportunity cost of producing wheat decreases from 0.001 bushels of corn per bushel of wheat to 0.0008 bushels of corn per bushel of wheat. This provides an incentive for the farmer to produce more wheat and less corn.

Suppose the price of corn increases from \$4 per bushel to \$5 per bushel. This means that the farmer can earn more revenue by producing corn, and he has to give up less wheat that he could have produced instead. Therefore, the opportunity cost of producing corn decreases from 0.001 bushels of wheat per bushel of corn to 0.0008 bushels of wheat per bushel of corn. This provides an incentive for the farmer to produce more corn and less wheat.

The following graph shows how the supply curves for wheat and corn shift when their prices change:

The graph shows that when the price of wheat increases from \$5 to \$6, the supply curve for wheat shifts to the right from S1 to S2, meaning that the quantity supplied of wheat increases at every price level. Conversely, when the price of corn increases from \$4 to \$5, the supply curve for corn shifts to the right from S3 to S4, meaning that the quantity supplied of corn increases at every price level.

## Conclusion

The law of supply and opportunity cost are related because they both affect how suppliers make decisions about what to produce and how much to produce. The law of supply states that as the price of a good or service increases, the quantity supplied also increases, and vice versa. Opportunity cost is what suppliers give up when they choose one production option over another. When the price of a good or service increases, the opportunity cost of producing that good or service decreases, providing an incentive for suppliers to increase their production and supply more of that good or service.