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What is the relationship between the price of a good or service and the quantity supplied, according to the law of supply?
What is the assumption made in the law of supply about firms?
What is the shape of the supply curve?
What happens to the supply curve when there is a change in the price of the good or service?
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What is an example of a factor that can shift the supply curve?
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Why do firms produce more when the price of the good or service increases?
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What is an exception to the law of supply?
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What happens to the quantity of labour supplied when the wage rate increases?
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What is assumed to remain constant in the law of supply?
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What is the market structure assumed in the law of supply?
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Study Notes
Law of Supply
The law of supply states that as the price of a good or service increases, the quantity supplied also increases, ceteris paribus (all other things being equal).
Key Assumptions:
- Ceteris paribus: all other factors that affect supply, such as technology, resource prices, and expectations, remain constant.
- The law of supply assumes that firms are profit-maximizers.
- The law of supply assumes that the market is perfectly competitive.
Graphical Representation:
- The supply curve slopes upward, indicating a positive relationship between price and quantity supplied.
- A change in the price of the good or service leads to a movement along the supply curve.
- A change in any other factor that affects supply leads to a shift of the supply curve.
Factors that Shift the Supply Curve:
- Changes in production costs
- Changes in technology
- Changes in resource prices
- Changes in expectations
- Changes in government policies and regulations
- Changes in the number of firms in the market
Reasons for the Law of Supply:
- As the price of the good or service increases, the profit margin of firms increases, making it more profitable for firms to produce more.
- As the price of the good or service increases, the opportunity cost of producing the good or service increases, making it more expensive for firms to produce less.
Exceptions to the Law of Supply:
- Giffen goods: a increase in price leads to an increase in demand, rather than an increase in supply.
- Labour supply: an increase in wage rates may lead to a decrease in the quantity of labour supplied, rather than an increase.
Law of Supply
- The law of supply states that as the price of a good or service increases, the quantity supplied also increases, assuming all other factors remain constant.
- The law of supply is based on three key assumptions: firms are profit-maximizers, the market is perfectly competitive, and all other factors that affect supply remain constant.
Key Assumptions
- Ceteris paribus: all other factors that affect supply, such as technology, resource prices, and expectations, remain constant.
- Firms are profit-maximizers.
- The market is perfectly competitive.
Graphical Representation
- The supply curve slopes upward, indicating a positive relationship between price and quantity supplied.
- A change in the price of the good or service leads to a movement along the supply curve.
- A change in any other factor that affects supply leads to a shift of the supply curve.
Factors that Shift the Supply Curve
- Changes in production costs.
- Changes in technology.
- Changes in resource prices.
- Changes in expectations.
- Changes in government policies and regulations.
- Changes in the number of firms in the market.
Reasons for the Law of Supply
- As the price of the good or service increases, the profit margin of firms increases, making it more profitable for firms to produce more.
- As the price of the good or service increases, the opportunity cost of producing the good or service increases, making it more expensive for firms to produce less.
Exceptions to the Law of Supply
- Giffen goods: a increase in price leads to an increase in demand, rather than an increase in supply.
- Labour supply: an increase in wage rates may lead to a decrease in the quantity of labour supplied, rather than an increase.
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Description
Understand the concept of Law of Supply, its key assumptions, and graphical representation in a competitive market.
