The law of supply is a direct relation between price and supply

# The law of supply is a direct relation between price and supply

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The law of supply is a direct relation between price and supply. Higher the price (P 1 ) greater the supply. A firm’s supply curve is equiv.aspt to its Marginal Cost curve. To construct market supply curves of a firm we have to make a lateral summation of the supply of firms. Therefore the market supply curve is much more flexible and flatter than the supply curves of individual firms. .aspnter> In Figure 36 we have DD and SS as industry demand and supply curves respectively. Their point of intersection is e where equilibrium is established. This is short run equilibrium under which Q is the qua.aspy bought and sold and P is the price charged. If the demand condition suddenly changes then the demand curve will shift upwards as D 1 D 1 . In the short run on the old supply curve SS a new equilibrium p.asp.asp. asp e 1 is established. In this equilibrium quantity exchanged increases to Q

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Unformatted text preview: 1 and the price rises as P 1 . With a rise in price the same firms start earning Super Normal profits. Therefore outside firms are attracted and start entering the industry. In the long run industry supply curve is shifted downwards as S 1 S 1 . A new point of equilibrium e 2 is established where D 2 D 2 and S 2 S 1 have intersected. In the new equilibrium position a larger quantity Q 1 is exchanged at the same old price P. The firms again earn only normal profits. The long run equilibrium price will depend upon the cost structures of the new and old firms. The price may take any one of the three forms in the long run. Normal possibility is that either the price will remain constant or it will be slightly higher than that in the short run....
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## This note was uploaded on 11/26/2011 for the course ECON MICRO ec 201 taught by Professor - during the Fall '10 term at Montgomery.

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The law of supply is a direct relation between price and supply

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