Law of Supply and the Supply Curve Chapter 7 Section 3

Profits and the Law of Supply To understand pricing, you must look at both demand and supply. The law of supply states that as the price of a good rises, the quantity supplied also rises. As the price falls, the quantity supplied also falls. The higher the price of a good, the greater the incentive is for a producer to produce more. Supplied

The Determinants of Supply Many factors affect the supply of a specific product. Four of the major determinants are: 1.Price of Inputs 2.# of Firms (Businesses) in the Industry 3.Taxes 4.Technology A change in the supply of a particular item shifts the entire supply curve to the left or right.

Any time the COST to the business DECREASES, then the COST of production DECREASES, and supplies will SUPPLY MORE goods Any time the COST to the business INCREASES, then the COST of production INCREASES, and supplies will SUPPLY FEWER goods

1. The price of inputs Examples of Inputs (Anything that goes in to making a product): raw materials wages (labor) land Examples of Inputs (Anything that goes in to making a product): raw materials wages (labor) land Price of Inputs increases Supply Decreases Price of Inputs increases Supply Decreases Price of Inputs decreases Supply increases Price of Inputs decreases Supply increases

2. The number of firms in the industry # of Businesses increases Supply Increases # of Businesses increases Supply Increases # of Businesses decreases Supply decreases # of Businesses decreases Supply decreases Examples: Businesses opening & closing Examples: Businesses opening & closing In a free-market economy, sellers enter and leave all the time

3. Taxes Taxes increase Supply decreases Taxes increase Supply decreases

The Determinants of Supply (cont.) 4. Technology Any increase in technology with increase supply

The Law of Diminishing Returns When a business wants to expand, it has to consider how much expansion will really help the business.

The Law of Diminishing Returns (cont.) Will product output continue to increase proportionally as more workers are hired? The law of diminishing returns shows that as more units of a factor of production are added to the other factors of production, after a certain point, the extra output for each additional unit hired will begin to decrease.

Equilibrium Price Chapter 7 Section 4

Equilibrium Price In free markets, prices are determined by the interaction of supply and demand. As the price of a good goes down, the quantity demanded rises and the quantity supplied falls (and vice versa). The point at which the quantity demanded and quantity supplied meet is called the equilibrium price.

Prices as Signals Under a free-enterprise system, prices function as signals that communicate information and coordinate the activities of producers and consumers.

Prices as Signals (cont.) Rising prices signal producers to produce more and consumers to purchase less. Falling prices signal producers to produce less and consumers to purchase more. A shortage occurs when at the current price, the quantity demanded is greater than the quantity supplied. Prices above the equilibrium price reflect a surplus to suppliers.

Prices as Signals (cont.) When a market economy operates without restriction, it eliminates shortages and surpluses. –When a shortage occurs, the price goes up to eliminate the shortage. –When surpluses occur, the price falls to eliminate the surplus.

Concept Trans 1

DFS Trans 1

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