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Lesson summary: Supply and its determinants

AP.MACRO:
MKT‑2 (EU)
,
MKT‑2.C (LO)
,
MKT‑2.C.1 (EK)
,
MKT‑2.D (LO)
,
MKT‑2.D.1 (EK)
In this lesson summary review and remind yourself of the key terms, graphs, and calculations used in the analysis of supply. Topics include the distinction between supply and quantity supplied, the law of supply, and the determinants of supply.

The law of supply

The law of supply states that there is a positive relationship between price and quantity supplied, leading to an upward-sloping supply curve. Sellers like to make money, and higher prices mean more money!
For example, let’s say that fishermen notice the price of tuna rising. Because higher prices will make them more money, fishermen spend more time and effort catching tuna. As a result, as the price rises, the quantity of tuna supplied increases.

The determinants of supply

Factors that influence producer supply cause the market supply curve to shift. For example, one of the determinants of supply in the market for tuna is the availability and the price of fishing permits. If more fishing permits are made available and the permit fee is lowered, we can expect more fisherman to enter the market; as a result, the supply of tuna will likely increase. Now, at every price, a greater quantity of tuna will be supplied to the market.

Key Terms

TermDefinition
supplya schedule or a curve describing all the possible quantities that sellers are willing and able to produce, at all possible prices they might encounter in a particular period of time; supply is represented in a graphical model as the entire supply curve.
law of supplyall other factors being equal, there is a direct relationship between a good’s price and the quantity supplied; as the price of a good increases, the quantity supplied increases; similarly, as price decreases, the quantity supplied decreases, leading to a supply curve that is always upward sloping.
quantity suppliedthe amount of a good or service that sellers are willing to sell at a specific price; quantity supplied is represented in a graphical model as a single point on a supply curve.
change in quantity supplieda movement along a supply curve resulting from a change in a good’s price
change in supplya movement or shift in an entire supply curve resulting from a change in one of the non-price determinants of supply
determinants of supplychanges in non-price factors that will cause an entire supply curve to shift (increasing or decreasing market supply); these include 1) the number of sellers in a market, 2) the level of technology used in a good’s production, 3) the prices of inputs used to produce a good, 4) the amount of government regulation, subsidies or taxes in a market, 5) the price of other goods sellers could produce, and 6) the expectations among producers of future prices.

Key Graphical Models

The supply curve demonstrates the relationship between a good’s price and the quantity producers are willing and able to supply. The upward sloping line demonstrates this direct relationship: as the price rises, the quantity supplied increases; as price decreases, quantity supplied decreases.
Figure 1: An upward sloping supply curve

Common Misperceptions

  • You may often hear people say, incorrectly, that higher prices lead to “more supply” and that lower prices lead to “less supply.” However, this is an incorrect use of the terms. Higher prices will result in an increased quantity supplied and lower price will result in a decrease in quantity supplied. Only a change in a non-price determinant of supply causes a good's supply to increase or decrease.

Discussion questions

  1. How would producers of a good, such as candy canes, adjust their current supply if they expect its price to rise in the future?
  2. How will increased regulation of producers by the government affect a good’s supply? What other government interferences in a market can influence the level supply of a good?
  3. In a correctly labelled graph, show an increase in the supply of a good. In another, correctly labelled graph, show an increase in the quantity supplied of a good. Explain why these two are different.

Want to join the conversation?

  • male robot hal style avatar for user DrumletNation
    What is a method for me to better remember the different detriments of supply?
    (5 votes)
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    • male robot donald style avatar for user Aryan S
      Well, you will have to learn them by heart and there is unfortunately no way around that. But, there are numerous mnemonics out there.

      For example, the mnemonic PINTS WC:
      P-Productivity
      I-Indirect Taxation
      N-Number of firms
      T-Technology
      S-Subsidies

      W-Weather
      C-Cost
      (18 votes)
  • blobby green style avatar for user vedk1510
    Do inferior goods disobey the law of supply too?
    (2 votes)
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    • hopper cool style avatar for user CalebHKim
      No, they don't. Let's go over the factors that change supply and see if they change for inferior goods.

      Price of Inputs: When goods require less inputs (material, money, etc.), they are cheaper to make, so the supply increases. This would also apply to inferior goods.
      Price of Related Goods: If a similar good is at a higher price AND makes you more profit, the supply of the original good would fall while the supply of the similar good rises. This would also apply to inferior goods: if those inferior goods make less money, the supply drops, and vice versa.
      Number of Suppliers: When more people are making a good, the supply increases. The same would happen with inferior goods, for more people may make it which results in a rise of supply.
      Technology Improvements: When a technology makes it cheaper or easier to produce a good, you can make more. Therefore, the amount of that good that can be produced increases, and the supply rises. The same can be applied to inferior goods; if inferior goods are now easier to make, you may as well make more of them.
      Expected Prices: If the expected price of a good is greater than the current price, suppliers will hold back their goods so that they can sell them later at higher prices. This results in a drop of CURRENT supply. If an inferior good's price is expected to increase in the future, the suppliers will also hold back which drops supply.

      Therefore, inferior goods obey the law of supply. Hope this helps!
      (8 votes)
  • starky tree style avatar for user XxWolf_GamezxX
    Price of Inputs: When goods require less inputs (material, money, etc.), they are cheaper to make, so the supply increases. This would also apply to inferior goods.
    Price of Related Goods: If a similar good is at a higher price AND makes you more profit, the supply of the original good would fall while the supply of the similar good rises. This would also apply to inferior goods: if those inferior goods make less money, the supply drops, and vice versa.
    Number of Suppliers: When more people are making a good, the supply increases. The same would happen with inferior goods, for more people may make it which results in a rise of supply.
    Technology Improvements: When a technology makes it cheaper or easier to produce a good, you can make more. Therefore, the amount of that good that can be produced increases, and the supply rises. The same can be applied to inferior goods; if inferior goods are now easier to make, you may as well make more of them.
    Expected Prices: If the expected price of a good is greater than the current price, suppliers will hold back their goods so that they can sell them later at higher prices. This results in a drop of CURRENT supply. If an inferior good's price is expected to increase in the future, the suppliers will also hold back which drops supply.

    Therefore, inferior goods obey the law of supply. Hope this helps!
    (4 votes)
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  • blobby green style avatar for user valeriesze
    The price refers to the price of supplying goods or the cost of goods?

    Should be the money or the resources (cost) that need to spend for the supplying, right? This makes sense to the tutorial but I just want to make sure.
    (3 votes)
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    • blobby green style avatar for user evan
      Yes, when it refers to prices in Supply it means the input prices and resource prices. For example, when Toyota wants to make a car the supply costs would be the prices of the steel, tires, seats, airbags, rims, and whatever else is needed to be bought by Toyota to assemble it into one car.
      (2 votes)
  • blobby green style avatar for user HI
    I dont get the difference of supply and quantity supply ㅠㅠ. Any one help me...
    (4 votes)
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  • blobby green style avatar for user Palak Deora
    1. If the producers expect prices to rise in future, they will decrease the supply of candy canes to the market, right now. They will start supplying in large quantities when the prices increase.
    2. If the government imposes regulations, such as increasing taxes, supply will be reduced. If the government pays the producers in the form of subsidies, then the supply may increase.
    3. Increase in supply of a good means a right shift in the supply curve. Whereas, increase in the quantity supplied of a good, can be seen as an increase in quantity supplied at a particular price.
    (3 votes)
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  • leaf grey style avatar for user Trihorus
    Let's say I'm a vendor who sells tomatoes. And the demand for tomatoes is high and so is the price. As a result, everyone including me starts getting more tomatoes to sell. Now, tomatoes are practically flooding in the market, and so the price would fall. Now because the price falls, hardly anyone is selling them, resulting in increased demand and the whole cycle keeps repeating.

    In this case, does it not mean that as the price increases, the quantity supplied only increases to a point before it decreases again. Isn't it more like a sine function?
    (2 votes)
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  • blobby green style avatar for user savannah.l.jenkins
    1. The producers would have to stock up on more supply or product in the present in order to have enough to produce in the future.

    2. If another good has a higher price and makes more profit, the supply of the original good would decrease while the supply of the similar good rises. Increased regulations can cause the cost of a product to rise, which can reduce the supply. Other government interventions involve subsidies and taxes.
    (1 vote)
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  • blobby green style avatar for user jg915747
    nothing
    (1 vote)
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  • leafers seed style avatar for user Allan
    Question 1: If they expect its price to rise in the future, they would decrease their current supply of candy canes.

    Question 2: Increased regulation of producers by the goverment decrease a good's supply. Other government interferences in a market such as increasing property taxes can decrease the level of supply of a good.

    Question 3: An increase in the supply of a good would shift the entire supply curve to the right. An increase in the quantity supplied of a good would shift at any point along the existing supply curve. These two are different because the increase of the supply of a good would at any given price point increase the supply whereas an increase in the quantity supplied of a good would only increase the supply based on price.
    (0 votes)
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