Supply

• Supply involves the relationship between

price and quantity.

• The Quantity Supplied is the amount that

producers wish to sell at various prices.
 Law of Supply
• The law of supply states: that producers will
offer more of a product at higher prices and
less of a product at lower prices.

• The quantity supplied of a good or service

varies directly with its price.

• Price and quantity have a Direct Relationship

 Law of Supply
According to the Law of Supply:
• When price goes , supply goes _____

• When price goes , supply goes _____

 Supply Curve
• The supply curve is a model that shows the
relationship between the price of an item and the
quantity supplied.

Price

Quantity
 Supply Curve
8.00

7.00

6.00
Price per jar ($)

5.00
4.00

3.00

2.00

1.00
10 20 30 40 50
Quantity (thousands of jars per month)
Figure 04-04
 Supply Application
Which of the following is the best example
of the Law of Supply?
a. A sandwich shop increases the number of
sandwiches it supplies when the price
increases.
b. A food producer increases the number of
acres of wheat he grows to supply a milling
company.
c. A catering company buys a new
dishwasher to make life easier.
d. A milling company builds a new factory to
process flour to export.
 Supply Application
Which of the following is the best example
of the Law of Supply?
a. A sandwich shop increases the number of
sandwiches it supplies when the price
increases.
b. A food producer increases the number of
acres of wheat he grows to supply a milling
company.
c. A catering company buys a new
dishwasher to make life easier.
d. A milling company builds a new factory to
process flour to export.
 What Determines Supply?
The determinants of supply include:
– Cost of resources
– Technology
– Short run costs
– Long run costs
– Taxes
 Determinants of Supply
• Determinants of supply will cause the
supply curve to shift.

Increase Decrease
Determinant of Demand or Supply?
• Orange crop damaged by freeze.
• Government report says orange juice
reduces heart disease.
• Price of grapefruit juice increases.
• OK Orange Juice adds on to its factory.
• OK Orange Juice workers get a raise.
• New orange squeezing technology
developed.
 Equilibrium
• The equilibrium price is the point: at
which quantity supplied and quantity
demanded are equal.
 Equilibrium
Price
S
P1

Q1 Quantity
 Equilibrium Price
10.00
9.00 Community
demand (D) Market
8.00 supply (S)
Price per jar ($)

7.00
6.00
5.00
4.00 Equilibrium
price (E)
3.00
2.00
1.00

10 20 30 40 50 60
Quantity (thousands of jars per month)
Figure 04-05
 Equilibrium Price
• If the market price or quantity supplied is
anywhere but at the equilibrium, the
market is in a state of disequilibrium.

• Disequilibrium can produce one of two

outcomes – excess demand or excess
supply.
 Excess Demand
• Excess demand occurs when quantity
demanded is more than quantity supplied.
• This results in a shortage.
• A shortage causes suppliers to raise their
prices until they reach a new equilibrium.
 Excess Supply
• Excess supply occurs when quantity
demanded is less than quantity
supplied.
• This results in a surplus.
• A surplus causes suppliers to lower
their prices until they reach a new
equilibrium.
 
 
 
Price
 
 

P1  

Q1 Quantity

Label a shortage on the above graph.

 
 
 
 
Price
 
 

P1  

Q1 Quantity

Label a surplus on the above graph.

 
 10.00
S2
9.00
D S1
8.00
7.00
Price per jar ($)

6.00
E2
5.00
4.00
E1
3.00
2.00
1.00

10 20 30 40 50 60
Quantity (thousands of jars per month)

Figure04-07
 
 
 
  Price
 

P1  

Q1 Quantity