True or False
The law of supply states that when the price of a good rises, the quantity supplied decreases.
False – The law of supply states that when the price rises, the quantity supplied increases.
This is one of the main advantages of the law of supply, as it helps predict that producers will supply more when prices increase.
What is predicting producer behavior?
This is a potential problem if producers overestimate demand and produce too much in response to higher prices.
What is overproduction?
The law of supply suggests that at lower prices, producers are more willing to supply products.
False – At lower prices, producers tend to supply less, as the lower price reduces profitability.
A higher price incentivizes producers to enter a market and invest more resources into production. This is an example of this economic effect.
What is motivating investment?
In this case, producers may not be able to increase supply regardless of price increases, which contradicts the law of supply.
What is perfectly inelastic supply?
A shift in the supply curve to the right means that producers are willing to supply more of a good at each price level, often due to a decrease in production costs.
True – A rightward shift in the supply curve indicates an increase in supply, which can result from factors like lower production costs or improved technology.
This type of market outcome occurs when the law of supply helps producers respond to price increases, eventually balancing the quantity supplied with demand.
What is market equilibrium?
The law of supply does not predict supply responses well in this situation, where government-imposed quotas, tariffs, or price ceilings can distort production decisions.
What are government regulations?
If a good has perfectly elastic supply, its supply curve will be horizontal.
True – Perfectly elastic supply means that producers are willing to supply any quantity at a specific price, leading to a horizontal supply curve.
List 4 pros of the law of supply
Helps Predict Producer Behavior, Market Equilibrium, Motivates Investment, Helps Governments with Policy.
List 3 cons
Overproduction Risks, Short-Term vs. Long-Term Supply, Environmental or Social Impact.