Definition of Supply
Supply is the different quantities of goods and services that firms are willing and able to produce at various price levels.
Quantity Supplied vs. Supply
Quantity supplied is the amount of a good or service that is produced at a particular price level.
Below is a supply curve. Quantity supplied is one point on the curve (i.e. A, B, or C), and supply is the entire line, including all of the points that create it.
Law of Supply
The law of supply states that the relationship between the price level and the quantity demanded of a good or service is direct, or positive. As the price level rises, firms are more willing and able to produce a greater quantity, and, therefore, produce more. As the price level falls, firms are less willing and able to produce the same quantity, and, therefore, produce less. This causes the supply curve to be upward-sloping.
Using the chart above, when the price rises from P1 to P2, the quantity supplied increases from 2 units to 8 units. When the price drops from P3 to P2, the quantity supplied decreases from 12 units to 8 units.
💡The only thing that changes quantity supplied is the price of the good or service.
Determinants of Supply
Determinants are factors that can cause the entire supply curve to increase or decrease. When there is an increase in supply (see graph below), the supply curve will shift to the right. At every price level, there is an increase in quantity supplied. When there is a decrease in supply (see graph below), the supply curve will shift to the left. At every price level, there is a decrease in quantity supplied.
There are several determinants of supply that cause the shift to the right (increase in supply) or the shift to the left (decrease in supply). We are going to use the acronym R-O-T-T-E-N as a way to remember all of the determinants.
💸 Unit 1: Basic Economic Concepts
1.0Unit 1: Basic Economic Concepts
1.1Basic Economic Concepts: Scarcity
1.2Resource Allocation and Economic Systems
1.3Production Possibilities Curve (PPC)
📈 Unit 2: Supply and Demand
2.4Price Elasticity of Supply
2.6Market Equilibrium and Consumer and Producer Surplus
2.7Market Disequilibrium and Changes in Equilibrium
2.8The Effects of Government Intervention in Markets
⚙️ Unit 3: Production, Cost, and the Perfect Competition Model
3.6Firms' Short-Run Decisions to Produce and Long-Run Decisions to Enter or Exit a Market
📊 Unit 4: Imperfect Competition
4.1Introduction to Imperfectly Competitive Markets
💰 Unit 5: Factor Markets
5.2Changes in Factor Demand and Factor Supply
5.3Profit-Maximizing Behavior in Perfectly Competitive Factor Markets
🏛 Unit 6: Market Failure and Role of Government
6.1Socially Efficient and Inefficient Market Outcomes
6.3Public and Private Goods
6.4The Effects of Government Intervention in Different Market Structures
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