Supply

By the end of this lesson, you will be able to state and apply the law of supply, distinguish movements along the supply curve from shifts, and identify all supply shifters.

The Law of Supply

All else equal, as price rises, quantity supplied increases; as price falls, quantity supplied decreases.

The supply curve slopes upward because:

1. Profit motive: higher prices make production more profitable → firms produce more
2. New entry: higher prices attract new producers into the market

The Supply Curve

Each point shows the quantity sellers are willing to produce and sell at a given price, holding all other factors constant.

Movement along the curve: caused only by a change in the good's own price.

Price ↑ → Quantity supplied ↑ (movement UP the curve — same curve)

Shifts of the Supply Curve

Everything else that affects supply (other than the good's price) causes the entire supply curve to shift.

Supply shifters (SPICE N):

S — Subsidies: government payments to producers → reduce costs → supply increases (right shift)

P — Prices of inputs (resources): if labor, materials, or energy become more expensive → costs rise → supply decreases (left shift)

I — Input prices and technology: technology improvements reduce production costs → supply increases

C — Competition (number of sellers): more sellers → supply increases

E — Expectations: if sellers expect future prices to be higher → supply now decreases (holding inventory)

N — Natural events: weather, natural disasters can increase or decrease supply

Producer Surplus

Producer surplus: the difference between the price a producer receives and the minimum price they were willing to accept. It's the profit above the minimum required to supply the good.

The supply curve shows the minimum price sellers would accept to produce each unit. Above that minimum = producer surplus.

Elastic vs. Inelastic Supply

Price elasticity of supply measures how responsive quantity supplied is to a price change.

• Elastic supply: quantity supplied responds strongly (time to adjust exists; many inputs available)
• Inelastic supply: quantity supplied responds weakly (fixed capacity; immediate time period)