Law of Supply
What is the law of supply?
The law of supply states that, all else being equal, an increase in the price of a good will increase the quantity supplied, and a decrease in price will decrease the quantity supplied. Supply follows Price
What is the law of demand?
The law of demand states that, all else being equal, as the price of a good decreases, the quantity demanded increases, and as the price increases, the quantity demanded decreases. Demand will be the opposite of Price
Name one determinant of supply.
Technology - Taxes - resource cost/production cost - government regulations - price of related goods - number of sellers - price
Give an example of determinant of demand
Price - Income - Preference - Expectations
What is elasticity of demand?
Elasticity of demand measures how sensitive the quantity demanded of a good is to a change in its price.
How does the supply curve look?
The supply curve slopes upward from left to right, indicating that as price increases, the quantity supplied increases.
How does the demand curve look?
The demand curve slopes downward from left to right, indicating that as the price decreases, the quantity demanded increases.
How does technology influence supply?
Advances in technology can lower production costs and increase efficiency, leading to an increase in supply.
How do consumer tastes affect demand?
If a good becomes more popular or trendy, consumer demand for it will increase; if it falls out of favor, demand will decrease.
What is an example of inelastic demand?
Inelastic demand for essential goods like gasoline, electricity, or prescription drugs where even if the price increases, people will still need to purchase them because they are considered necessities and have few substitutes,
What happens when resource prices increase?
When resource prices increase, the cost of production goes up, leading to a decrease in supply because producers are less willing or able to produce at the same level.
What happens to demand when consumer income increases?
When consumer income increases, the demand for normal goods typically increases, as consumers have more purchasing power.
What effect does the number of suppliers have on supply?
An increase in the number of suppliers generally increases market supply, while a decrease in the number of suppliers reduces it.
What happens to demand when the number of buyers increases?
When the number of buyers increases, the overall demand for a good or service increases.
How does income affect the elasticity of demand?
For normal goods, as income increases, the demand typically becomes less elastic because consumers are less sensitive to price changes.
Describe a real-world example of the law of supply.
A real-world example of the law of supply is during a holiday season when toy manufacturers increase production of popular toys because they can sell them at higher prices due to increased demand.
Give an example of a complementary good
An example of complementary goods is peanut butter and jelly; when the price of peanut butter decreases, the demand for jelly often increases.
Explain how subsidies (financial assistance from government) affect supply.
Subsidies lower production costs for producers, which increases the supply of the subsidized good.
Describe how related goods influence demand.
Related goods can be substitutes or complements. For example, an increase in the price of a substitute (like tea) may increase the demand for another good (like coffee).
Give an example of elastic supply
Elastic supply occurs when the quantity supplied changes by a larger percentage than the price change. Luxury goods, such as jewelry and expensive cars, tend to have a more elastic supply.
Explain how taxes affect supply.
Taxes increase production costs, which reduces the quantity supplied because it becomes more expensive for firms to produce the same amount of goods.
Explain how consumer expectations influence demand.
If consumers expect prices to rise in the future, they are more likely to buy now, increasing current demand. Conversely, if they expect prices to fall, they may delay purchases, decreasing current demand.
Describe how supplier expectations can change supply.
If suppliers expect higher prices in the future, they may reduce current supply to sell more at the anticipated higher prices later.
Explain how consumer expectations can shift demand.
If consumers expect future price increases, they may buy more now, increasing current demand. If they expect price drops, they might delay purchases, reducing current demand.
Explain why gasoline demand is inelastic.
Gasoline demand is inelastic because it is a necessity for many consumers who have few immediate substitutes, so changes in price do not significantly affect the quantity demanded.