Principles of Macroeconomics

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Supply

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Principles of Macroeconomics

Definition

Supply refers to the quantity of a good or service that producers are willing and able to sell at various prices during a given time period. It represents the relationship between the price of a product and the amount of that product producers are willing to offer for sale.

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5 Must Know Facts For Your Next Test

  1. The law of supply states that as the price of a good rises, the quantity supplied of that good also rises, and vice versa.
  2. Producers are willing to supply more at higher prices because higher prices make it profitable to expand production.
  3. The supply curve slopes upward from left to right, reflecting the positive relationship between price and quantity supplied.
  4. Supply determinants, such as changes in input prices or technology, can shift the supply curve to the left or right.
  5. Market supply is the horizontal sum of the individual supply curves of all producers in the market.

Review Questions

  • Explain the relationship between the price of a good and the quantity supplied of that good.
    • According to the law of supply, there is a positive relationship between the price of a good and the quantity supplied of that good. As the price rises, producers are willing and able to supply more of the good because higher prices make it more profitable to expand production. Conversely, as the price falls, the quantity supplied decreases because it is less profitable for producers to maintain the same level of output. This relationship is reflected in the upward-sloping supply curve.
  • Describe how changes in supply determinants can affect the supply curve.
    • Supply determinants are factors that can shift the supply curve to the left or right, independent of changes in price. These include input prices, technology, government policies, and the number of sellers in the market. For example, if the price of a key input rises, the supply curve will shift to the left, indicating that producers are willing to supply less of the good at any given price. Conversely, if a technological innovation reduces production costs, the supply curve will shift to the right, reflecting an increase in the quantity supplied at each price point.
  • Analyze how changes in market supply can affect the equilibrium price and quantity in a market.
    • The equilibrium price and quantity in a market are determined by the intersection of the demand and supply curves. If there is a change in market supply, it will lead to a shift in the supply curve, which will in turn affect the equilibrium. For instance, if market supply increases, the supply curve will shift to the right, leading to a lower equilibrium price and a higher equilibrium quantity. Conversely, if market supply decreases, the supply curve will shift to the left, resulting in a higher equilibrium price and a lower equilibrium quantity. These changes in the equilibrium reflect the market's adjustment to the new supply conditions.
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