The Law of Supply and the Supply Curve Chapter 7 Section 3 The Law of Supply and the Supply Curve

Law of Supply Rule stating that price and quantity move in the same direction. A direct relationship (Law of Demand is an inverse relationship). Example – As the price of a good increases the quantity supplied will also increase (and vice versa).

Quantity Supplied The amount of a good or service that a producer is willing and able to supply at a specific price. Producers are motivated by profit incentives – The higher the price the higher the revenues – covers additional production costs.

Showing Supply Supply Schedule – Table showing quantities supplied at various prices Supply Curve – Upward sloping line that shows in graph form the quantities supplied at each possible price.

Determinants of Supply “Things” that can increase or decrease the supply and make it the supply curve shift left or right.

Cont. Price of Inputs – If the cost of the materials used in making the item decrease then more items can be produced at a lower cost (Supply curve shifts right) and vice versa. Example – As technology improves and inputs such as microchips have become smaller and less expensive, cause many items to become less expensive over time (DVD Players, Plasma or LCD TV’s).

Cont. Number of Firms in Industry – If the number of firms increases there will be a larger supply of goods which will shift prices the supply curve to the right (and vice versa). Example – As profits in an industry are increasing more firms will enter the industry and this will increase the overall supply of goods available.

Cont. Taxes – If government increases the taxes, producers will have higher costs and will therefore cause the supply curve to shift left (and vice versa).

Cont. Technology – Improvements in technology allow suppliers to produce items at a lower cost which will cause the demand curve to shift to the right.

Law of Diminishing Returns Rule that states as more units of a factor of production are added to other factors of production, at some point total output continues to increase but at a diminishing rate. Example – If you have two sewing machines and two employees and you then decide to add an additional employee production will not increase as much (not enough machines)