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Economics Form 5 Science

Chapter 1 : Theory of Demand and Supply

SUPPLY CURVE

Definition:

            A supply curve is a line which slopes upwards from left to right showing that as price increases quantity supplied increases and as price decreases quantity supplied decreases. It is a graphical representation of a supply schedule. It is drawn assuming that all other factors influencing supply are held constant except price of the good.

As the price of the good varies, we move along the

                      As price increases from 1000 to 5000 FRS quantity supplied also increases from 60kg to 442kg. The movement up and down along the same supply curve reflects the law of supply which states that everything being equal, the higher the price of a good the higher the quantity supplied and the lower the price, the lower the quantity supplied. Alternatively, more of a normal good is supplied at a higher price than at a lower price.

 

Explanation of the Law of Supply

         There are three main reasons used to explain the law of supply I. e why the supply curve slopes upward from left to right.

 

  1. The Profit Motive: Since the main objective of any producer/supplier is profit maximization, a rise in price would make it more profitable for the consequently, rising prices will send signals to the producers that they can increase their profits by increasing their output in the market especially if price rise and is not cost-pushed. If this happens, there would be a direct relationship between price and quantity supplied hence, more being supplied at a higher price.

 

  1. Substitution and Costs of Production: The upward sloping nature of the supply curve from left to right is again explained by the idea of factor substitution and cost of production. In many instances, the resources and production techniques used by a producer are adaptable to a variety of products. For example a farmer’s land and capital may be efficient in producing com, beans, millet, and wheat amongst others. As the price ol, say, com rises, the farmer will shin resources from other products to com because it pays him more to produce more com. In this case, more com will be produced as its price rises and less will be produced as price falls. This again justifies the direct relationship between price and quantity supplied.

 

  1. New producers coming into the market: In a competitive market, higher prices create incentives for new producers to enter into the market. This is possible in the long run when a higher price will attract new producers to come into the industry and output will increase. The behaviour of suppliers towards changes in prices of goods confirms that "more is supplied at a higher price than at a lower price.
par Claude Foumtum
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