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ADAM SMITH: A Scottish professor (born 1723, died 1790) who is considered the father of modern economics for his revolutionary book, entitled An Inquiry into the Nature and Causes of the Wealth of Nations published in 1776.

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Lesson 6: Supply | Unit 2: Law of Supply Page: 5 of 19

Topic: Definition <=PAGE BACK | PAGE NEXT=>

The law of supply is the basic principle underlying supply.

A definition:

The law of supply is a direct relationship between supply price and the quantity supplied, ceteris paribus.

  • Direct relationship means that people sell more of a good if the price is higher and less if the price is lower.
  • The law of supply is not as rigid as the law of demand. The price and the quantity supplied are not always directly related. Higher prices could cause an increase or a decrease in the quantity supplied.
Ceteris paribus is also important to the law of supply.
  • Ceteris paribus means other things remain unchanged.
  • Law of supply applies exclusively to the relationship between supply price and quantity supplied.
  • All other things that can affect supply must remain constant to avoid distorting this relationship.
  • Because supply is affected by many factors other than price, the price/quantity supply relationship can get lost when other things change.
  • Other factors that affect supply are called supply determinants.

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AGGREGATE SUPPLY

The total (or aggregate) real production of final goods and services available in the domestic economy at a range of price levels, during a given time period. Aggregate supply, usually abbreviated AS, is two different relations between price level and real production--long run and short run. With long-run aggregate supply, prices and wages are flexible and all markets are in equilibrium. With short-run aggregate supply some prices and wage are NOT flexible and some markets are NOT in equilibrium. This is one half of the AS-AD (aggregate market) analysis. The other half is aggregate demand.

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Today, you are likely to spend a great deal of time at a garage sale trying to buy either a T-shirt commemorating the second moon landing or a coffee cup commemorating Thor Heyerdahl's Pacific crossing aboard the Kon-Tiki. Be on the lookout for the happiest person in the room.
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Ragnar Frisch and Jan Tinbergen were the 1st Nobel Prize winners in Economics in 1969.
"Success is more a function of consistent common sense than it is of genius. "

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