GED Social Studies Practice Test: What is Supply?

Supply is the flip side of demand. It is the quantity of goods or services that a producer is willing to sell (at different price points).

The law of supply states that more goods and services are offered by producers when they can command higher prices. When people aren’t willing to pay as much, suppliers must either (a) be willing to see their businesses hurt (not likely); or (b) lower their prices.

Producers in a capitalist system are in business for one reason: the profit motive.

Profit = revenues (how much money a producer takes in) — costs of production.

Company X charges $100 for a car part. But it costs the company $80 to manufacture the part (this reflects the human, capital, and natural resources used). So $100 — $80 = $20 (put another way, that’s 20% of the manufacturing cost). That’s the profit per unit for Company X. But — and this is a big but — a producer must be sensitive to the market: how much are consumers willing and able to pay. Company X might be able to make an even better car part, but it would cost double the current amount to manufacture ($160), and it would have to charge $200 to make the same profit: (20% of the manufacturing cost here would be $40). Company X may do some research and discover that people simply don’t want to pay that much for a basic car part; it’s just not worth the cost to them. Thus, producing the more expensive good is a bad idea.

Here’s a graphic that shows the relationship between the price of a good or service and the quantity that a producer will supply. Naturally, producers want to charge as much as possible for their goods or services.

Let’s say this supply curve applies to the maker of high-end motorcycles. The company is willing to make 100,000 of the motorcycles that sell for $30,000. It can make a large profit. Conversely, the company is only willing to make 20,000 units of its low-priced ($5000) cycles.

Each point on this graph is a particular combination of price and quantity supplied. As you may have noticed, the upward slope of this graph is the opposite of the downward slope of the demand graph shown previously.

econ pic 4

 

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