Law+of+Supply

=LAW OF SUPPLY =

__Supply__: The amount of goods and services that businesses are willing and able to produce at different prices during a certain period of time.

__**Key terms**__:
 * direct relationship
 * upward-sloping
 * price
 * quantity

toc

__ Law of Supply: __
assuming all things equal there is a positive direct relationship between an INCREASE in price and will yield an INCREASE in quantity.
 * assuming other things equal
 * direct relationship between price and quantity supplied
 * as price rises, quantity supplied rises
 * as price falls, quantity supplied falls
 * to a supplier price represents revenue and encourages production and selling of the product (the higher the price the greater the incentive to produce and the greater the quantity supplied)
 * simply, the higher the price and thus potential profit, the more supply the producer will introduce to the market.

__ Interpreting the Graphs: __

 * movement along the supply curve is caused by change in PRICE


 * Shifting from S0 to S1 (a rightward shift ) indicates a INCREASE in supply.
 * Shifting from S1 to S0 (a leftward shift ) indicates a DECREASE in supply.

__ Practice: __

 * 1) Draw an affected supply curve for CDs when itunes doesn't function. (Include both original curve and effected curve).
 * 2) Draw an affected supply curve for itunes downloads when CDs won't download onto MP3 players. (Include both original curve and effected curve).
 * 3) Draw an affected supply curve for apples when apple farmers strike. (Include both original curve and effected curve).

__ Answers: __
1. 2. 3.

__ Economics in the News: __
http://www.economist.com/node/18200694?story_id=18200694&fsrc=rss "A Special Report on Feeding the World: Waste not, Want not"The Economist February 24, 2011

__ Abstract: __
This article demonstrates in a practical manner the application of the supply law in a market place. The law of supply is when assuming all other things equal, there is a positive direct relationship between an increase in price of a good or service and an increase in quantity of the product produced. Contrarily a low price of a product will lead to reduced production of the product. It is this later condition, which is demonstrated in food supply in Africa. There, “30-50% of all food produced rots away uneaten”(The Economist). Routinely, grain, once harvested is piled on the ground, and covered by a sheet, this approach is wholly ineffective in discouraging pilfiring by rats and other vermon. Such consumption by rodents and insects is sufficient enough to account for the reason that “many small holders are net purchasers of food even though they grow enough for their families to eat” (Schmidhuber, The Economist). Correction of this dilemma will require a minimal economic investment in basic agricultural processing and storage facilities. However, because the cost of food is so low the producers do not have the incentive to invest in such programs. The law of supply dictates that higher prices would encourage greater production. However, since prices of food would remain low, there is no incentive for the farmers to produce more, and thus no incentive to invest in such relatively inexpensive and primitive technological advances.

Another economic concept, which I believe is likely to occur is an unintended consequence of nonmarket intervention to correct the problems of food waste. The head of the international fund for agricultural development anticipates that food losses could be reduced by half raising output by 25% (Nwanze, The Economist). Such a dramatic effect could impact upon market equilibrium. Market equilibrium is the concept whereby in a free market system(limited government intervention), there is a balance between market supply and demand. Change in technology, in this case innovation in agricultural storage practice, will lead to marked increase in supply without similar increase in demand. This would cause a shift of the equilibrium curve to the left. With all other things being equal, an increase in quantity of a food will lead to reduction in price. This reduced price will reduce the income farmers receive for producing the food, economic burden on the farmers. Such a hardship may result in economic failure of many farmers and primary producers, paradoxically causing an increase in poverty and hunger amongst the former farmers. This would also demonstrate the dangers of government or government equivalents (outside international agencies) interference with the free market system. However, this prophecy is based on unchanging demand. Increase in population growth may influence that assumption and thus my pessimistic scenario may not be realized. Something as mundane as food spoilage can thus illustrate the universal application of economic principles such as law of supply and market equilibrium.

__ References: __
1.http://www.investopedia.com/terms/l/lawofsupply.asp 2.http://www.netmba.com/econ/micro/supply/curve/ 3.http://www.raybromley.com/notes/equilchange.html 4.http://www.economist.com/node/18200694?story_id=18200694&fsrc=rss