Lesson Overview
Supply represents how much of a good or service producers are willing and able to offer for sale at various prices.
This lesson explains the law of supply, how firms make production decisions, and the factors that shift the supply curve.
Learning Objectives
- Define supply in economic terms.
- Explain the law of supply.
- Construct and interpret a supply schedule and supply curve.
- Identify determinants that shift supply.
- Distinguish between a change in quantity supplied and a change in supply.
The Law of Supply
The law of supply states that, all else equal, when the price of a good rises, the quantity supplied rises. When the price falls, the quantity supplied falls.
Higher prices increase potential profit, encouraging firms to expand production.
Supply Schedule and Supply Curve
A supply schedule is a table showing quantities supplied at different prices.
A supply curve is typically upward sloping, reflecting the direct relationship between price and quantity supplied.
Change in Quantity Supplied vs. Change in Supply
Change in Quantity Supplied
Caused by a change in price. Represented as movement along the supply curve.
Change in Supply
Caused by factors other than the good’s own price. Represented as a shift of the entire supply curve.
Determinants of Supply (Shifters)
- Input costs (wages, raw materials)
- Technology
- Taxes and subsidies
- Expectations about future prices
- Number of sellers
Real-World Example
If new technology reduces production costs, supply increases. The supply curve shifts to the right.
If input costs rise significantly, supply decreases.
Practice Questions
- If the market price rises, what happens to quantity supplied?
- What happens to supply if production costs increase?
- Is a tax on producers a movement along the curve or a shift?
What’s Next?
In Lesson 2.3: Market Equilibrium, we will combine supply and demand to understand how prices are determined in competitive markets.