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Discovering why sellers are more willing to provide products when they can sell them for more money.
If you were selling your old toys, would you be more excited to set up a shop if you could get dollars per toy, or just dollar?
In economics, Supply is the amount of a product that a seller is willing to offer at a certain price. The Law of Supply is a simple rule: when the price of an item goes up, sellers want to provide more of it. When the price goes down, they want to provide less. Imagine you are a baker. If the price of a cupcake rises from dollar to dollars, you would probably stay up all night baking as many as possible! This happens because a higher price makes the hard work feel 'worth it.' We call the amount you make the Quantity Supplied.
Let's look at how price changes your behavior as a seller: 1. You sell cookies for each. You only bake cookies because it takes a lot of time. 2. Suddenly, everyone wants your cookies and is willing to pay each. 3. Because you can earn more money, you decide to bake cookies instead. 4. The price went up, so your supply went up!
Quick Check
According to the Law of Supply, if the price of a video game increases, will a store want to sell more or fewer copies?
Answer
The store will want to sell more copies because they can earn more money from each sale.
Why do sellers behave this way? It's all about Profit. Profit is the money left over after you pay for your supplies (like flour, sugar, and electricity).
If it costs you dollar to make a toy and you sell it for , your profit is only . That's not much! But if the price jumps to , your profit becomes . With that much profit, you can afford to buy better machines, hire friends to help, and produce way more toys than before.
A factory makes wooden cars. It costs dollars in wood and dollar in labor to make one car (Total Cost = ). 1. If the market price is , the profit is . 2. If the market price rises to , the profit is . 3. With profit per car, the factory owner will buy a second wood-cutting machine to double their production.
Quick Check
If the cost to make a product stays the same but the selling price goes down, what happens to the profit?
Answer
The profit decreases, which usually makes the seller want to produce less.
Economics is like a tug-of-war between Buyers and Sellers. They have opposite goals!
* Buyers want the lowest price possible so they can keep more of their money. * Sellers want the highest price possible so they can earn more profit.
When the price is high, sellers are happy and supply a lot, but buyers might not want to buy much. When the price is low, buyers are happy, but sellers might stop making the product because they aren't making enough money. Finding the perfect middle ground is how a healthy economy works!
Imagine you have only pounds of clay. You can make small beads or large vases. 1. Beads sell for each, and vases sell for each. 2. Even though vases take more clay, the high price () makes you want to use all your clay for vases to maximize your total earnings. 3. If the price of beads suddenly rose to each, you would switch your entire supply from vases to beads because the 'incentive' changed.
Which of these best describes the Law of Supply?
If a baker's profit per cake increases from to , what is the baker likely to do?
Buyers and sellers generally want the same thing when it comes to prices.
Review Tomorrow
In 24 hours, try to explain to a friend why a toy store would want to stock more of a toy that just doubled in price.
Practice Activity
Look around your house. Pick an item and imagine you are the manufacturer. If the price of that item doubled tomorrow, what three things would you do to make more of them?