Supply

Chapter 7

The Law of Supply

The law of supply holds that other things

equal, as the price of a good rises, its

quantity supplied will rise, and vice versa.
Why do producers produce more output
when prices rise?
They seek higher profits
They can cover higher marginal costs of

production

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Supply schedule

Graph the schedule. How is this

different from a demand curve?

Supply Curve

The supply curve has a positive slope,

consistent with the law of supply.

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Practice Graphing
Graphing a

supply schedule.
Draw the graph.
Label the axis.
Plot the points.
Connect to create

supply curve.

Video Example of cre

ating a supply curve

Graphing from a supply equation.

Q=a+(b x price)

Solve equation.
Determine

interception points.
Draw the graph.
Label the axis.
Plot points based
on rise and run.
(rise / run)
Connect points to
create supply
curve.

Supply Schedule Practice

Graph the supply curves for the schedules
below.
Graph 2: Plot schedules
Graph 1: Plot
S1, S2 and S3
schedules S1 and S2
S1

S2

S1

S2

S3

Reason for law of supply

The law of supply is the

result of the law of

increasing cost.

As the quantity of a good

produced rises, the marginal

opportunity cost rises.
Sellers will only produce and sell
an additional unit of a good if the
price rises above opportunity cost
of producing the additional unit.
DOES IT PAY TO MAKE MORE?

Change in supply vs. change in

quantity supplied

Change in supply

Change in quantity supplied

Shift in the Supply Curve

A change in any variable other than price

that influences quantity supplied produces

a shift in the supply curve or a change in
supply.
Factors that shift the supply curve include:
Change in input costs
Increase in technology
Change in size of the industry

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Shift in the Supply Curve

For an given rental price, quantity supplied is

now lower than before.
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Price of resources
As the price of a resource rises,

profitability declines, leading to a reduction

in the quantity supplied at any price.

Technological improvements
Technological improvements (and any changes

that raise the productivity of labor) lower

production costs and increase profitability.

Expectations and supply

An increase in the

expected future
price of a good or
service results in a
reduction in current
supply.

Increase in # of sellers
What happens to the supply curve?

Prices of other goods

Firms produce and sell more than one

good or service.
Firms respond to the profitability of the
different items that they sell. (which
has more profit?)
The supply decision for a particular good
is affected not only by the goods own
price but also by the prices of other
goods and services the firm may
produce.

Equilibrium
In economics, an equilibrium is

a situation in which:
there is no inherent tendency
to change,
quantity demanded equals
quantity supplied, and
the market just clears.
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Market equilibrium cont.

Where supply and demand intersect =
best price and quantity for all consumers
and firms

Equilibrium

Equilibrium occurs at a price of $3 and a

quantity of 30 units.
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Shortages and Surpluses

A shortage occurs when quantity

demanded exceeds quantity supplied.

A shortage implies the market price is too

low.

A surplus occurs when quantity supplied

exceeds quantity demanded.

A surplus implies the market price is too

high.

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Price above equilibrium

If the price exceeds the equilibrium price, a

surplus occurs:

Price below equilibrium

If the price is below the equilibrium a

shortage occurs:

Shift in the Demand Curve

This demand curve has shifted to the right. Quantity

demanded is now higher at any given price.
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Equilibrium After a Demand Shift

The shift in the demand curve moves the market

equilibrium from point A to point B, resulting in a
higher price and higher quantity.

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Demand rises
What happens to the equilibrium?

Demand falls
What happens to the equilibrium?

Equilibrium After a Supply Shift

The shift in the supply curve moves the market equilibrium

from point A to point B, resulting in a higher price and
lower quantity.
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Supply rises
What happens to the equilibrium?

Supply falls
What happens to the equilibrium?

Price Ceilings & Floors

A price ceiling is a legal maximum that can be

charged for a good.

Results in a shortage of a product

Common examples include apartment rentals

and credit cards interest rates.

A price floor is a legal minimum that can be

charged for a good.

Results in a surplus of a product

Common examples include soybeans, milk,

minimum wage

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Price Ceiling

A price ceiling is set at $2 resulting in a

shortage of 20 units.
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Price Floor

A price floor is set at $4 resulting in a

surplus of 20 units.
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TO REVIEW:

Practice graphing supply and

demand:
Graph the two schedules on the same
graph(remember, P=Price):

Supply Schedule
#1: Demand Schedule

What is the equilibrium price?

Practice graphing supply and

demand:
Graph the two schedules on the same graph:

#2

*What is the Equilibrium Price?

*Draw an arrow and label to show the DIRECTION of
change for each if:
*DEMAND rises
(D2)
*SUPPLY rises (S2)
*DEMAND falls
(D3)
*SUPPLY falls (S3)

Practice Questions:

SUPPLY/DEMAND PRACTICE LINK

Beef supplies are

sharply reduced
because of drought in
the beef-raising states,
and consumers turn to
pork as a substitute for
beef. How would you
illustrate this change in
the beef-market in
supply-and-demand
terms?

Answer: The supply curve for beef should

shift leftward (or upward), to reflect the

drought. This causes the price of beef to
rise, and the quantity consumed to
decrease.
We would not move the demand curve here.

The decrease in quantity demanded is due

to the price of beef rising, due to the shift of
the supply curve.

Practice questions:
In December, the
price of Christmas
trees rises and the
quantity of trees
sold rises. Is this
a violation of the
law of demand?

Answer: No. This is not simply a move along

the demand curve here. In December demand
for Christmas trees rises, causing the curve to
shift to the right. This allows both the price of
Christmas trees and the quantity sold of
Christmas trees to rise.