Study Notes
Supply refers to the quantity of a good or service that producers are willing and able to sell at various prices over a given period, assuming all other factors remain constant. The law of supply states that there is a direct relationship between price and quantity supplied, meaning they move in the same direction.
- Supply — the quantity of a good or service a producer is willing and able to sell at various prices during a given period of time, ceteris paribus. Example: A farmer supplies more wheat when the price per bushel increases.
- Law of Supply — states that price and quantity supplied have a direct relationship, ceteris paribus. Example: As the price of rice increases, more kilos are supplied by farmers.
- Supply Curve — a graphical representation showing the quantity supplied at various prices. Example: An upward sloping curve indicates higher quantities supplied at higher prices.
- Non-price Determinants of Supply — factors other than price that can cause the supply curve to shift. Example: Changes in technology or the number of firms can shift the supply curve.
- Law of Diminishing Marginal Returns — in the short run, adding more of a variable input to a fixed input will eventually result in decreasing additional output. Example: Adding more workers to a fixed number of machines eventually leads to less additional output per worker.
Exam Tips
Key Definitions to Remember
- Supply
- Law of Supply
- Supply Curve
- Non-price Determinants of Supply
- Law of Diminishing Marginal Returns
Common Confusions
- Confusing movement along the supply curve with shifts of the supply curve
- Misunderstanding the impact of non-price determinants on supply
Typical Exam Questions
- What is the law of supply? The law of supply states that there is a direct relationship between price and quantity supplied, ceteris paribus.
- How do non-price determinants affect supply? Non-price determinants can cause the supply curve to shift left or right, indicating a change in supply at every price level.
- What happens to supply when the price of a related good changes? The supply of a good can increase or decrease depending on whether the goods are in joint or competitive supply.
What Examiners Usually Test
- Understanding of the law of supply and its graphical representation
- Ability to distinguish between movements along and shifts of the supply curve
- Knowledge of how non-price determinants affect supply