The Law of Supply and Costs of Production

Law of Supply The higher the price, the larger the quantity produced (the opposite effect of the law of demand) To make more $ (this is an incentive for new businesses to enter the market), producers will offer more of a good if prices rise, and less of a good if prices fall This causes firms who cannot compete to drop out of the market or to produce less goods

Surplus A surplus is when the quantity supplied is greater than the quantity demand Producers react to a surplus by lowering prices Examples: old iPhone models the previous year’s car model

Shortage A shortage is when quantity demanded is greater than quantity supplied. During a shortage, producers and stores tend to raise prices Example: new iPhones and popular new cars

Fixed and Variable Costs Economists divide a producer’s costs into fixed costs and variable costs A fixed cost is a cost that does not change, no matter how much is produced Examples: rent and machinery repairs

Variable Cost A variable cost is a cost that rises or falls depending on the quantity produced Examples: the cost of raw materials (potatoes for fries / beef for burgers at In-N-Out) and some labor Fixed and variable costs are added together to find the total cost for a producer (supplier / seller) of a good