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Supply
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