LAW OF SUPPLY. Focus Activity P Q 0 S What does this tell you about the Law of Supply?

LAW OF SUPPLY

Focus Activity

P

Q0

S

What does thistell you about the Law of Supply?

SUPPLY

• Law of Supply• The law of supply states that, ceteris parabis, the

quantity supplied of a good rises when the price of the good rises

• Why?• The promise of increased revenues when prices are high

encourages firms to produce more.

• Market Entry: Rising prices draw new firms into a market and add to the quantity supplied of a good.

• Quantity supplied is the amount of a good that sellers are willing and able to sell

The Supply Curve: The Relationship between Price and Quantity Supplied

• Supply Schedule• The supply schedule is a table that shows the

relationship between the price of the good and the quantity supplied

Ben’s Supply Schedule

Supplied

The Supply Curve: The Relationship between Price and Quantity Supplied

• Supply Curve• The supply curve is the graph of the relationship

between the price of a good and the quantity supplied

Figure 5 Ben’s Supply Schedule and Supply Curve

Price ofIce-Cream

Cone

0

2.50

2.00

1.50

1.00

1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones

$3.00

12

0.50

1. Anincrease in price ...

2. ... increases quantity of cones supplied.

Changes in the Supply Curve

• Change in Quantity Supplied• Movement along the supply curve• Caused by a change in anything that alters the

quantity supplied at each price

1 5

Price of Ice-Cream Cone

Quantity of Ice-Cream Cones0

S

1.00

A

C$3.00 A rise in the price

of ice cream cones results in a movement along the supply curve.

Change in Quantity Supplied

Shifts in the Supply Curve

• Change in Supply• A shift in the supply curve, either to the left or right• Caused by a change in a determinant other than

price

Shifts in the Supply Curve (N.I.C.E.J.A.G.)

• Natural/Man-Made Phenomenon (weather, strikes, riots)

• Input Costs (raw materials, technology)

• Competition (number of producers)

Shifts in the Supply Curve (N.I.C.E.J.A.G.)

• Expectation of Future Prices (producers supply less if price is expected to rise)

• Profit of goods in joint supply (oil/gas)

• Profit of alternative goods in supply (car manufacturers)

• Gov’t Action (taxes / subsidy)

Figure 7 Shifts in the Supply Curve

Price ofIce-Cream

Cone

Quantity ofIce-Cream Cones

0

Increasein supply

Decreasein supply

Supply curve, S3

curve, Supply

S1Supply

curve, S2

Practice

Practice