LAW OF SUPPLY
Focus Activity
P
S
What does this
tell you about the
Law of Supply?
0
Q
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
$3.00
1. An
increase
in price ...
2.50
2.00
1.50
1.00
0.50
0
1 2
3
4
5
6
7
8
9 10 11 12 Quantity of
Ice-Cream Cones
2. ... 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
Change in Quantity Supplied
Price of IceCream
Cone
S
C
$3.00
A rise in the price
of ice cream
cones results in a
movement along
the supply curve.
A
1.00
0
1
5
Quantity of
Ice-Cream
Cones
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
Supply curve, S3
Decrease
in supply
Supply
curve, S1
Supply
curve, S2
Increase
in supply
0
Quantity of
Ice-Cream Cones
Practice
Practice