LAW OF SUPPLY

Focus Activity P Q 0 S What does this tell you about the Law of Supply?

SUPPLY Law of Supply The law of supply states that, ceteris parabis, the quantity supplied of a good rises when the price of the good rises Why? The promise of increased revenues when prices are high encourages firms to produce more. Market Entry: Rising prices draw new firms into a market and add to the quantity supplied of a good. Quantity supplied is the amount of a good that sellers are willing and able to sell

The Supply Curve: The Relationship between Price and Quantity Supplied Supply Schedule The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied

Ben’s Supply Schedule Supplied

The Supply Curve: The Relationship between Price and Quantity Supplied Supply Curve The supply curve is the graph of the relationship between the price of a good and the quantity supplied

Figure 5 Ben’s Supply Schedule and Supply Curve Price of Ice-Cream Cone Quantity of Ice-Cream Cones $ An increase in price increases quantity of cones supplied.

Changes in the Supply Curve Change in Quantity Supplied Movement along the supply curve Caused by a change in anything that alters the quantity supplied at each price

1 5 Price of Ice- Cream Cone Quantity of Ice-Cream Cones 0 S 1.00 A C $3.00 A rise in the price of ice cream cones results in a movement along the supply curve. Change in Quantity Supplied

Shifts in the Supply Curve Change in Supply A shift in the supply curve, either to the left or right Caused by a change in a determinant other than price

Shifts in the Supply Curve (N.I.C.E.J.A.G.) Natural/Man-Made Phenomenon (weather, strikes, riots) Input Costs (raw materials, technology) Competition (number of producers)

Shifts in the Supply Curve (N.I.C.E.J.A.G.) Expectation of Future Prices (producers supply less if price is expected to rise) Profit of goods in joint supply (oil/gas) Profit of alternative goods in supply (car manufacturers) Gov’t Action (taxes / subsidy)

Figure 7 Shifts in the Supply Curve Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Increase in supply Decrease in supply Supply curve,S 3 curve, Supply S 1 curve,S 2

Practice