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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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