Chapter 7 Section 3
The Law of Supply and the
Supply Curve
Clip of the Day
Law of Supply

Rule stating that price and quantity move
in the same direction. A direct relationship
(Law of Demand is an inverse
relationship).

Example – As the price of a good increases the
quantity supplied will also increase (and vice
versa).
Quantity Supplied
The amount of a good or service that a
producer is willing and able to supply at a
specific price.
 Producers are motivated by profit
incentives – The higher the price the
higher the revenues – covers additional
production costs.

Showing Supply

Supply Schedule – Table showing
quantities supplied at various prices

Supply Curve – Upward sloping line that
shows in graph form the quantities
supplied at each possible price.
Determinants of Supply

“Things” that can increase or decrease the
supply and make the supply curve shift
left or right.
Cont.
Price of Inputs – If the cost of the
materials used in making the item
decrease then more items can be
produced at a lower cost (Supply curve
shifts right) and vice versa.
 Example – As technology improves and
inputs such as microchips have become
smaller and less expensive, cause many
items to become less expensive over time
(DVD Players, Plasma or LCD TV’s).

Cont.
Number of Firms in Industry – If the
number of firms increases there will be a
larger supply of goods which will shift
prices the supply curve to the right (and
vice versa).
 Example – As profits in an industry are
increasing more firms will enter the
industry and this will increase the overall
supply of goods available.

Cont.

Taxes – If government increases the
taxes, producers will have higher costs
and will therefore cause the supply curve
to shift left (and vice versa).
Cont.

Technology – Improvements in
technology allow suppliers to produce
items at a lower cost which will cause the
supply curve to shift to the right.
Law of Diminishing Returns
Rule that states as more units of a factor
of production are added to other factors of
production, at some point total output
continues to increase but at a diminishing
rate.
 Example – If you have two sewing
machines and two employees and you
then decide to add an additional employee
production will not increase as much (not
enough machines)
