4.1 The Law of Supply

Notes

Supply is the willingness and ability of producers to offer a good for sale at each possible price.

• Law of supply: when the price of a good rises, the quantity supplied rises, and when the price falls, quantity supplied falls, ceteris paribus.
• Why: higher prices mean higher potential profit, so existing firms produce more and new firms enter the market.
• A supply schedule lists the quantity supplied at each price. A supply curve slopes upward from left to right.
• Market supply adds the quantities of all sellers at each price.
• Price elasticity of supply measures how much quantity supplied responds to price: $\displaystyle E_s = \frac{\% \text{ change in quantity supplied}}{\% \text{ change in price}}$. Supply is more elastic when producers can change output quickly; it is usually more elastic in the long run than in the short run.
• Worked example: the price of phone cases rises $10\%$ and quantity supplied rises $25\%$, so $\displaystyle E_s = \frac{25\%}{10\%} = 2.5$, which is elastic.