Law of Supply
The Law of Supply states there is a positive correlation between the price of a product and the quantity supplied by producers. As prices increase, suppliers are willing to supply a larger quantity.
Market Supply Curve
The supply curve illustrates the Law of Supply. The height of the supply curve indicates the minimum price required to supply a unit and reflects the opportunity cost of production. If the market price is below the required cost, that quantity is not produced.
Producer Surplus
Producer surplus is the difference between the lowest price a producer would accept and the market price. It represents the net gains producers receive from selling goods.
Elastic vs. Inelastic Demand
- Elastic Demand: Quantity demanded changes significantly with price changes; often has close substitutes.
- Inelastic Demand: Quantity demanded changes little with price changes; few substitutes available.
Changes in Demand vs. Quantity Demanded
- Change in Demand: A shift of the entire demand curve.
- Change in Quantity Demanded: Movement along the demand curve due to price changes.
Demand Curve Shifters
Demand can shift due to changes in consumer income, population, related goods' prices, expectations, demographics, and consumer preferences.
Normal vs. Inferior Goods
- Normal Goods: Demand increases with income.
- Inferior Goods: Demand decreases with increased income.
Changes in Supply vs. Quantity Supplied
- Change in Supply: Shift of the entire supply curve.
- Change in Quantity Supplied: Movement along the same supply curve due to price changes.
Supply Curve Shifters
Factors causing shifts in supply include resource price changes, technological advancements, natural events, political disruptions, and tax changes.
Market Equilibrium
Equilibrium occurs where the quantity demanded equals the quantity supplied. Prices above equilibrium create excess supply, leading to downward pressure, while prices below equilibrium lead to excess demand, causing upward pressure. At equilibrium, both consumer and producer surplus reach maximum, indicating overall market efficiency.