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RESOURCES: The labor, capital, land, and entrepreneurship used by society to produce consumer satisfying goods and services. Land provides the basic raw materials--vegetation, animals, minerals, fossil fuels--that are inputs into the production of goods (natural resources). Labor is the resource that does the "hands on" work of transforming raw materials into goods. Capital is the comprehensive term for the vast array of tools, equipment, buildings, and vehicles used in production. Entrepreneurship is the resource that undertakes the risk of bringing the other resources together and initiating the production process.

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Lesson 6: Market 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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INTEREST-RATE EFFECT

A change in aggregate expenditures on real production, especially those made by the household and business sectors, that results because a change in the price level alters the interest rate which then affects the cost of borrowing. This is one of three effects underlying the negative slope of the aggregate demand curve associated with a movement along the aggregate demand curve and a change in aggregate expenditures. The other two are real-balance effect and net-export effect.

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