TAILIEUCHUNG - Ten Principles of Economics - Part 8

Ten Principles of Economics - Part 8. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 75 SUPPLY We now turn to the other side of the market and examine the behavior of sellers. The quantity supplied of any good or service is the amount that sellers are willing and able to sell. Once again to focus our thinking let s consider the market for ice cream and look at the factors that determine the quantity supplied. quantity supplied the amount of a good that sellers are willing and able to sell WHAT DETERMINES THE QUANTITY AN INDIVIDUAL SUPPLIES Imagine that you are running Student Sweets a company that produces and sells ice cream. What determines the quantity of ice cream you are willing to produce and offer for sale Here are some possible answers. Price The price of ice cream is one determinant of the quantity supplied. When the price of ice cream is high selling ice cream is profitable and so the quantity supplied is large. As a seller of ice cream you work long hours buy many icecream machines and hire many workers. By contrast when the price of ice cream is low your business is less profitable and so you will produce less ice cream. At an even lower price you may choose to go out of business altogether and your quantity supplied falls to zero. Because the quantity supplied rises as the price rises and falls as the price falls we say that the quantity supplied is positively related to the price of the good. This relationship between price and quantity supplied is called the law of supply Other things equal when the price of a good rises the quantity supplied of the good also rises. Input Prices To produce its output of ice cream Student Sweets uses various inputs cream sugar flavoring ice-cream machines the buildings in which the ice cream is made and the labor of workers to mix the ingredients and operate the machines. When the price of one or more of these inputs rises producing ice cream is less profitable and your firm supplies less ice cream. If input prices rise substantially you might shut down

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