Unit 2: Supply and Demand
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.
- When price level increases, the quantity of a good supplied increases.
- When price level decreases, the quantity of a good supplied decreases.
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.