1 In the supply curve,
we want to know the relationship
between price and quantity supplied.
Let’s make it really simple by keeping everything else constant.
That means ceteris paribus,
2 Great, only price and quantity left.
As usual, we put the price on the vertical axis
and quantity on the horizontal axis.
As producers, we love profits like bees love honey.
Since price increases revenue, (pause)
Increase in revenue increases profits,
The higher the price, the merrier!
3 At $2, we’ll supply 10 cakes.
But at $4, woah, higher price,
Let’s supply more cakes. (20)
Connect the dots.
Tada, the supply curve!
Note-- it’s upward sloping.
When price increases, quantity supplied increases.
When price decreases, quantity supplied decreases.
The arrows are in the same direction.
This is the law of supply:
there’s an direct relationship
between price and quantity supplied,
given everything else constant.
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Next up: Change in quantity supplied vs change in supply
Why is there a direct relationship between price and quantity supplied? How does the supply curve look like?
In a supply curve, the price is on the vertical axis and the quantity is on the horizontal axis. Since revenue minus cost equals to profit, as price increases, revenue increases, so profit increases. For producers, the higher the price, the better. So they will supply more goods. Hence, as price increase, quantity supplied increases. There is a direct relationship between price and quantity supplied. So the supply curve slopes upwards. In other words, the supply curve has a positive gradient.
The law of supply states that there is a direct relationship between price and quantity supplied.