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Law of SupplyPrice and Quantity are conversely related.

The role of supply is most easily analyzed in competitive markets where the “invisible hand” of competition operates.

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Price and quantity are conversely related:

As Price Increases, Quantity Supplied Increases

As Price Decreases, Quantity Supplied Decreases

P

Q0

S

P

Q0

S

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Supply Curve for Soy Beans

The supply curve shows the possible conbinations of prices and quantities supplied of a product (Soy Beans).

A change in a product’s price causes a movement along the supply curve, thus a change in quantity supplied.

When the price of Soy Beans falls from $2.00 to $1.50 per Kilogram, then quantity supplied also falls from 9 million to 5 million kilograms, because farmers find it profitable to produce fewer soy bean plants.

The positive (upward) slope of the supply curve illustrates the direct relationship between price and quantity supplied.

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Changes in Supply There are factors that may cause

the entire supply curve to shift -- supply determinants.

There can be an increase or decrease in Supply:

Increase in Supply: an increase in the quantity supplied of a product at all prices(S2).

Decrease in Supply: a decrease in the quantity supplied of a product at all prices (S3).

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What Causes an Increase/ Decrease in Supply

1.Price of the product (the higher/lower the price, the greater/less the supply)

2.Reduction/Increase in production costs (Example: a wage increase or a resource price

decrease)

3.Technological Change (always improves productivity and reduces

costs, ie. automation)

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What Causes an Increase/ Decrease in Supply

4. Tax Changes (a decrease/increase in taxes causes an

increase/decrease in supply)

5. Favourable/Unfavourable Climate (affects supply in some goods, ie. Agriculture)

6. Producer Expectations (optimism/pessimism will alter supply

patterns)