Like the quantity demanded the quantity supplied is

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Unformatted text preview: d, the quantity supplied is measured as an amount per unit of time. For example, suppose that GM produces 1,000 cars a day. The quantity of cars supplied by GM can be expressed as 1,000 a day, 7,000 a week, or 365,000 a year. Without the time dimension, we cannot tell whether a particular quantity is large or small. Many factors influence selling plans, and again one of them is the price of the good. We look first at the relationship between the quantity supplied of a good and its price. Just as we did when we studied demand, to isolate the relationship between the quantity supplied of a good and its price, we keep all other influences on selling plans the same and ask: How does the quantity supplied of a good change as its price changes when other things remain the same? The law of supply provides the answer. The Law of Supply The law of supply states: Other things remaining the same, the higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller is the quantity supplied. Why does a higher price increase the quantity supplied? It is because marginal cost increases. As the quantity produced of any good increases, the marginal cost of producing the good increases. (You can refresh your memory of increasing marginal cost in Chapter 2, p. 35.) It is never worth producing a good if the price received for the good does not at least cover the marginal cost of producing it. When the price of a good rises, other things remaining the same, producers are willing to incur a higher marginal cost, so they increase production. The higher price brings forth an increase in the quantity supplied. Let’s now illustrate the law of supply with a supply curve and a supply schedule. Supply Curve and Supply Schedule You are now going to study the second of the two most used curves in economics: the supply curve. And you’re going to learn about the critical distinction between supply and quantity supplied. The term supply refers to the entire relationship between the price of a good and the quantity supplied of it. Supply is illustrated...
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This note was uploaded on 04/04/2012 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue University-West Lafayette.

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