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Chapter 5: Problem 3

a. State the law of supply. b. Explain the direct relationship between the price of a good and the quantity supplied.

Short Answer

Expert verified
The law of supply states that there's a direct relationship between price of a good and the quantity supplied, implying that high prices encourage producers to supply more goods and services due to increased opportunities for profit, while lower prices lead to fewer goods and services being supplied.

Step by step solution

01

Stating the Law of Supply

The law of supply states that there is a direct relationship between the price of a good and the quantity supplied. Formally, it could be stated as: 'Ceteris paribus (all other things being equal), when the price of a good or service increases, the quantity supplied also increases, and vice versa.'
02

Understanding the Direct Relationship

The direct relationship between the price and quantity supplied means that as price goes up, the quantity that producers are willing and able to sell also goes up. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.
03

Explanation

On the other hand, if the price goes down, the quantity that producers are willing and able to sell also decreases. This is because with a reduced price, the potential revenue and hence, potential profit, goes down.

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Most popular questions from this chapter

Identify a good that has an upward-sloping supply curve. Identify a good that has a vertical supply curve

Define: a. supply b. law of supply c. direct relationship d. quantity supplied e. supply curve f. supply schedule

Three months ago the price of a good was \(\$ 4\) and the quantity supplied was 200 units. Today the price is \(\$ 6,\) and the quantity supplied is 400 units. Did the quantity supplied rise because the price increased, or did the price rise because the quantity supplied increased?

The previous section explained how a supply curve can be vertical. If a supply curve is vertical, does it follow that supply is (a) elastic, (b) inelastic, (c) unit-elastic, or (d) none of the above? Explain your answer.

Define: a. elastic supply b. inelastic supply c. per-unit cost d. subsidy e. quota f. technology
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