Supply and demand are two fundamental aspects of economics. It is the combination of these elements that makes up a market. Therefore, it is paramount to understand both concepts in order to appreciate the mechanisms of economic theory.
Supply is the ability and willingness of merchants to provide commodities for sale. Quantity supplied is a definite amount of goods at established prices. A supply curve depicts the connections between the price and quantity supplied of a good or service within a certain time period.
In order to understand supply curves, one must also comprehend the law of supply, production costs, marginal costs, and profit maximization. The law of supply states that as the price of an item rises the quantity supplied similarly increases. As the price falls, so too does the quantity supplied. In other words, there is a positive relationship between price and quantity supplied.
Another major factor in determining a supply curve are the costs of production. Production costs usually include inputs, or factors of production, and technological advances. Factors of production are divided into two categories: fixed costs and variable costs. Fixed costs are those expenditures that remain constant when changes in output occur; they may include rent, taxes, and interest payments on debts. Variable costs, on the other hand, change along with levels of output. Labor, raw materials, and electricity are examples of variable costs. Rising variable costs force the market price of a product to rise as well. This may affect the quantity supplied. Low production cost relative to market price makes an item profitable and provides an impetus for increased supply. Inversely, high production costs in relation to price render a good unprofitable. This leads to either a reduction in production or a change of business.
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