Download Law of Supply

LAW OF SUPPLY
a. Define the Law of Supply and the Law of Demand.
LAW OF SUPPLY
 The Law of Supply states that producers will be motivated to sell more
goods and services at higher prices than at lower prices.
 as price increases, the quantity supplied increases
 there is a direct relationship between price and quantity supplied on the
supply curve in a market.
 You can remember the supply curve is upward-sloping by remembering that
supply has the word UP in it
A SUPPLY CURVE
DETERMINANTS OF SUPPLY
 There are generally 5 accepted concepts that can lead to a change
in supply (a shift in the supply curve). These are: input prices,
productivity, the price of a substitute in production, the number of
firms in a market, the expected future price of the product.
INPUT PRICES
 The price of inputs has a negative effect on the supply curve, if
the price of inputs goes up, supply will decrease (shift left)
INPUT PRICES
 magine you are running a taco shop, and the price of corn goes up. Since it
now costs more to supply tacos, you are going to have to charge more for your
tacos, or shift your supply curve left (Sl). Workers organizing a union would also
count as an increase to input prices (assuming the union negotiated higher wages).

 Similarly, if the price of corn goes down, you can now afford to supply the
same amount of tacos at a cheaper price which results in an increase in supply (Sr).
PRODUCTIVITY
 Productivity basically means the cost of the process to produce the goods. For example,
if a new form of technology means you can produce things more cheaply, supply will
increase (Sr). This happened when Ford designed the assembly line, it became cheaper to
mass produce items so supply increased. A counter example is regulation, if the
government wants to make the workplace safer but slowing down production, this would
cause a decrease in supply (Sl).
 Another example would be a blight or natural disaster to a farm. Destroying the crops
available would definitely hurt productivity, and thus shift the supply curve left (Sl).
THE PRICE OF A SUBSTITUTE
IN PRODUCTION
 This one is tricky, but imagine that you can make both tacos and
fuel with corn. If you are a taco producer, then fuel is a substitute in
production. If the price of fuel goes up, then you are more likely to
produce fuel than tacos, so a decrease in the supply of tacos would
occur (Sl). But if fuel suddenly becomes cheaper, it is now better to
produce tacos, so we will see an increase in the supply of tacos (Sr).
NUMBER OF FIRMS IN
THE MARKET
 This determinant leads us to the conclusion that competition is
better for the market. As we see more and more firms enter the
market, more and more of the good in question gets produced. So an
increase in the number of firms gives us an increase in supply (Sr),
while a decrease in the number of firms gives us a decrease in supply
(Sl
THE EXPECTED FUTURE
PRICE OF THE PRODUCT
 This has to deal with hoarding behavior. If everyone expects the
price of gold to be higher in the future, they will sell less of it now to
take advantage of higher future prices. This causes a decrease in
supply (Sl). However, if people expect the price of houses to drop in
the future, then everyone will want to sell today, which will result in an
increase in supply (Sr).