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Theory of Supply
« on: April 06, 2016, 10:36:32 AM »
Supply is the quantity of a product that a producer is willing and able to supply onto the market at a given price in a given time period.

The law of supply - as the price of a product rises, so businesses expand supply to the market. A supply curve shows a relationship between price and how much a firm is willing and able to sell.



Explaining the Law of Supply

There are three main reasons why supply curves are drawn as sloping upwards from left to right giving a positive relationship between the market price and quantity supplied:

    1.The profit motive: When the market price rises following an increase in demand, it becomes more profitable for businesses to increase their output
    2.Production and costs: When output expands, a firm's production costs tend to rise, therefore a higher price is needed to cover these extra costs of production. This may be due to the effects of diminishing returns as more factor inputs are added to production.
    3.New entrants coming into the market: Higher prices may create an incentive for other businesses to enter the market leading to an increase in total supply.








 

Theory of Demand

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