Grade 7

Intermediate

7 min

Lesson 5 of 12

The Law of Supply

Not Started

Understanding how producers decide how much to sell based on market prices.

If you were running a business and the price of your product suddenly doubled overnight, would you work harder to sell more or would you close up shop early?

Learning Objectives

1.State the Law of Supply and identify the profit motive of producers
2.Explain the direct relationship between price ( $P$ ) and quantity supplied ( $Q_s$ )
3.Distinguish between the behavior of a seller (supply) and a buyer (demand)

The Producer's Goal: Profit

In economics, a producer (or seller) is someone who creates a good or service to sell. Unlike buyers, who want to save money, producers are motivated by profit. Profit is the money left over after paying for all the costs of production. The formula for profit is:

Profit = Total\ Revenue - Total\ Cost

When the market price of a good goes up, the potential for profit increases. This creates an incentive for the producer to work harder, hire more staff, or buy more raw materials to produce more of that good. If the price is too low, the producer might not even make enough to cover their costs, leading them to produce very little or even switch to selling something else entirely.

Quick Check

What is the primary motivation for a producer to increase the amount of goods they bring to the market?

Think about why someone starts a business in the first place.

Answer

The primary motivation is profit—the desire to make more money after costs are paid.

The Law of Supply

The Law of Supply states that there is a direct relationship between price and quantity supplied. This means that as the price of a good increases, the quantity of that good that suppliers are willing to produce also increases. Conversely, as the price falls, the quantity supplied falls. We can express this relationship using symbols:

P \uparrow \implies Q_s \uparrow

P \downarrow \implies Q_s \downarrow

This happens because higher prices make it worth the extra effort and expense to produce more. It is called a 'direct' relationship because both variables move in the same direction.

Imagine you own a pizza shop. 1. At a price of $2 per slice, you only make 50 slices because you can't afford much cheese or extra help. 2. If the market price rises to$ 5 per slice, you can now afford to stay open later and buy more ingredients. 3. Because the price ( $P$ ) went up, your quantity supplied ( $Q_s$ ) increases to 150 slices.

Quick Check

If the price of a toy drops from $20 to$ 10, what will likely happen to the quantity supplied by the manufacturer?

Remember that price and quantity supplied move in the same direction.

Answer

The quantity supplied will decrease.

Sellers vs. Buyers

It is easy to get confused between supply and demand. To keep them straight, remember that they represent two different groups of people with opposite goals.

* Buyers (Demand): Want the lowest price possible. They have an inverse relationship with price ( $P \uparrow, Q_d \downarrow$ ). * Sellers (Supply): Want the highest price possible. They have a direct relationship with price ( $P \uparrow, Q_s \uparrow$ ).

When you think about supply, you must put yourself in the shoes of the business owner, not the customer. A high price is 'bad news' for a buyer, but 'great news' for a seller!

A Supply Schedule is a table showing how much a seller will produce at different prices. Let's look at a smartphone manufacturer:

1. At $P =$ 200 $,$ Q_s = 1,000 $units. 2. At$ P = $500$ , $Q_s = 5,000$ units. 3. At $P =$ 800 $,$ Q_s = 12,000$ units.

As the price increases by $300$ or $600$ , the manufacturer adds more factory shifts to maximize their profit.

Why doesn't a seller just produce an infinite amount? Because of increasing marginal costs. 1. To produce 100 units, you use your best machines. 2. To produce 1,000 units, you have to use old, slow machines and pay workers 'overtime' (extra pay). 3. This means your cost per unit ( $C$ ) starts to rise. 4. You will only produce those extra units if the Price ( $P$ ) is high enough to cover those rising costs: $P > C$ .

Key Takeaways

1The Law of Supply states that price and quantity supplied have a direct relationship.
2Producers are motivated by profit, which is calculated as $Total\ Revenue - Total\ Cost$ .
3When prices rise, sellers are willing to produce more because they can cover higher production costs and earn more profit.
4Sellers and buyers react to price changes in opposite ways: sellers want high prices, while buyers want low prices.

Quick Check

Multiple Choice

Which of the following best describes the Law of Supply?

Multiple Choice

If a baker sees the price of cupcakes rise from $1 to$ 4, what is their most likely reaction?

True/False

The relationship between price and quantity supplied is 'inverse.'

What's Next?

Review Tomorrow

In 24 hours, try to sketch a small graph with Price on the vertical axis and Quantity on the horizontal axis. Which way should the line point to show the Law of Supply?

Practice Activity

Next time you are in a store, pick a product. Imagine you are the factory owner. If the store told you they would pay you double for that item, what three things would you change in your factory to make more of them?

Browse

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The Law of Supply

Learning Objectives

The Producer's Goal: Profit

The Law of Supply

Sellers vs. Buyers

Key Takeaways

Quick Check

What's Next?

The Law of Supply

Learning Objectives

The Producer's Goal: Profit

The Law of Supply

Sellers vs. Buyers

Key Takeaways

Quick Check

What's Next?