Transcript The law of supply

Chapter 7 Section 3
Law of Supply and the Supply Curve
Profits and the Law of Supply
• To understand pricing, you must look at both
demand and supply.
• The law of supply states that as the price of a good
rises, the quantity supplied also rises. As the price
falls, the quantity supplied also falls.
• The higher the price of a good, the greater the
incentive is for a producer to produce more.
Supplied
Supplied
The Determinants of Supply
A change in the supply of a particular item shifts the
entire supply curve to the left or right.
Many factors affect the supply of a specific product.
Four of the major determinants are:
1. Price of Inputs
2. # of Firms (Businesses) in the Industry
3. Taxes
4. Technology
Any time the COST to the business INCREASES,
then the COST of production INCREASES, and
supplies will SUPPLY FEWER goods
Any time the COST to the business DECREASES,
then the COST of production DECREASES, and
supplies will SUPPLY MORE goods
1. The price of inputs
Examples of Inputs
(Anything that goes in to
making a product):
raw materials
wages (labor)
land
Price of Inputs increases
Supply Decreases
Price of Inputs decreases
Supply increases
2. The number of firms in the industry
Examples:
Businesses opening
& closing
# of Businesses increases
Supply Increases
# of Businesses decreases
Supply decreases
In a free-market economy, sellers
enter and leave all the time
3. Taxes
Taxes increase
Supply decreases
The Determinants of Supply (cont.)
4. Technology
Any increase in technology
with increase supply
The Law of Diminishing Returns
When a business wants to expand, it has to
consider how much expansion will really help
the business.
The Law of Diminishing Returns (cont.)
• Will product output continue to increase
proportionally as more workers are hired?
• The law of diminishing returns shows that as
more units of a factor of production are added
to the other factors of production, after a
certain point, the extra output for each
additional unit hired will begin to decrease.
Chapter 7 Section 4
Equilibrium Price
Equilibrium Price
In free markets, prices are determined
by the interaction of supply and
demand.
• As the price of a good goes down, the
quantity demanded rises and the quantity
supplied falls (and vice versa).
• The point at which the quantity demanded
and quantity supplied meet is called the
equilibrium price.
Prices as Signals
Under a free-enterprise system, prices
function as signals that communicate
information and coordinate the
activities of producers and consumers.
Prices as Signals (cont.)
• Rising prices signal producers to produce
more and consumers to purchase less.
• Falling prices signal producers to produce
less and consumers to purchase more.
• A shortage occurs when at the current
price, the quantity demanded is greater
than the quantity supplied.
• Prices above the equilibrium price reflect a
surplus to suppliers.
Prices as Signals (cont.)
• When a market economy operates without
restriction, it eliminates shortages and
surpluses.
– When a shortage occurs, the price goes
up to eliminate the shortage.
– When surpluses occur, the price falls to
eliminate the surplus.
Concept Trans 1
DFS Trans 1
DFS Trans 2
DFS Trans 3
DFS Trans 4