Chapter 7, Problem 2AA

To determine

To ascertain: a short paragraph about the supply using all the terms given.

Explanation of Solution

The law of supply says that there is a positive association between the quantity of commodity supplied and its price. It clearly means that as the price of a commodity or services increases, the quantity supplied will also rise because the producers of that commodity and services will earn more profit when the price increases which motivates them to produce and sell more amount. Opposite is true when the price falls. When the price of commodity or service is lower than its equilibrium price then the sellers will supply fewer commodities and services due to which there will be market shortage. Similarly, surplus will exist when the price is above the equilibrium level of price. The supply curve shows how much commodity or service is supplied at a given level of price. It is an upward sloping curve because of law of diminishing return. The law of diminishing returns state that as more and more number of inputs are added for the production of commodities and services, it starts contributing lesser and lesser to the total output. Hence, to compensate it, the producer wants more price of the product.

Economics Concept Introduction

Introduction:   The demand and supply plays a significant part in microeconomics. The equilibrium exist when the demand and supply of a commodity or service intersects each other.