Micro CHAPTER 2.2:

CHAPTER SUMMARY

The quantity supplied of a good or service is how much business would produce of something at one price level. For example, if a car is priced at $35,000, car makers would want to make 8,000 of them. Supply is the quantity supplied at all different price levels, so it is represented on a graph as a supply curve. When the price is low, the quantity supplied is low because businesses don't want to produce things and receive a low price for it, but as the price rises, the quantity supplied also rises since businesses can make more money producing it, so the supply curve is always upward-sloping. This is known as the law of supply, and can be seen in the chart below (P = Price, Q = Quantity Demanded).

When the price changes, the quantity supplied changes but supply does not. The supply curve can shift, though, due to any of the following factors (known as determinants of supply by the acronym C.E.N.T.):

• Cost of production: If the cost of producing something falls - due to changes in technology or the cost of resources - businesses are willing to supply more of it.

• Expectations: If businesses are expecting the economy to grow, they might increase their supply now to make sure they are ready.

• Number of producers: If more producers join the market, supply increases.

• Taxes & subsidies: Supply can change if the government increases the cost of production by adding taxes or decreases the cost of production by giving subsidies (money given to a business by the government for producing something).

When overall supply increases, the curve shifts to the right. When supply decreases, the curve shifts to the left. This can be seen in the charts below. The original curve is labeled as S, but the new curve after the change is labeled as S1.

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