Supply Curve

Definition

A supply curve is a graphical representation that shows the relationship between the price of a good or service and the quantity supplied by producers over a given period. Typically, the supply curve slopes upward, indicating that as prices increase, producers are willing to supply more of the good. This concept is vital for understanding how prices and quantities interact in markets, affecting both producers and consumers.

5 Must Know Facts For Your Next Test

1. The supply curve is typically upward sloping due to the Law of Supply, meaning higher prices incentivize producers to supply more.
2. Factors that can shift the supply curve include changes in production costs, technology improvements, and government policies such as taxes or subsidies.
3. A vertical supply curve indicates perfectly inelastic supply, where quantity supplied remains constant regardless of price changes.
4. Conversely, a horizontal supply curve represents perfectly elastic supply, where any price change leads to an infinite quantity supplied.
5. Changes in market conditions, like increased competition or changes in consumer preferences, can also lead to shifts in the supply curve.

Review Questions

• How does the Law of Supply relate to the shape of the supply curve?
  • The Law of Supply states that as the price of a good rises, the quantity supplied also increases, which directly influences the upward slope of the supply curve. This means that producers are motivated to produce more when they can sell their goods at higher prices. Therefore, the positive relationship between price and quantity supplied is visually represented by the upward slope of the curve.
• Analyze how external factors can cause shifts in the supply curve and give an example.
  • External factors such as changes in production costs, advancements in technology, or new regulations can lead to shifts in the supply curve. For instance, if a new technology lowers production costs for smartphones, this would allow manufacturers to produce more at every price level. Consequently, the supply curve would shift to the right, indicating an increase in overall market supply at all prices.
• Evaluate the impact of government intervention on the supply curve and its implications for market equilibrium.
  • Government intervention, such as imposing taxes or providing subsidies, can significantly affect the supply curve. For example, if a government imposes a tax on a product, it raises production costs for suppliers. This would shift the supply curve to the left, indicating a decrease in quantity supplied at each price level. The resulting decrease in market supply can lead to higher equilibrium prices and lower quantities sold, impacting both consumers and producers in the market.

Related terms

Law of Supply:

A principle stating that all else being equal, an increase in price results in an increase in quantity supplied.

Market Equilibrium:

The point at which the supply and demand curves intersect, indicating the price and quantity where the market clears.

Elasticity of Supply: A measure of how responsive the quantity supplied is to a change in price, indicating whether supply is elastic or inelastic.