The Marketplace: Supply

Law of Supply Supply is the seller’s plan for the amount of a product that would be offered for sale at different prices in a defined time period. Law of Supply – states that price and the quantity supplied are directly related. As prices rise the quantity supplied will also rise.

Supply curve

Law of Supply Why? Profit Incentive – producers would be able to make more profit from goods sold at higher prices Substitution – if producers can produce more than one type of good, they will naturally produce the good that makes them the most profit.

What causes a shift? Anytime one of the other factors change, supply will shift.

Supply Determinants Other than price, what things determine Supply? Costs of Production (Land, Labor, and Capital) Technology (increased efficiency) Number of firms (more companies in the market= greater competition) Taxes and Subsidies (Ford vs. Toyota) Expectations If all these remain constant, then supply is a function of price.

Supply and Demand

Supply and Demand Market/Equilibrium Price – price at which supply and demand meet. Market filters out all buyers unable to pay price P. Market filters out all suppliers whose costs exceed P.

Surplus Price above will result in a surplus To eliminate the surplus (extra inventory) the seller must lower the price to the market price. How do sellers do this?

Surplus

Shortage Price below will result in a shortage To eliminate the shortage, the seller must raise the price to the market price. How do sellers do this?

Shortage