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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