SkarpChapter 3 of 5
Understanding the Supply Curve
Behind every product is a seller deciding whether production is worthwhile. The supply curve connects those decisions to costs, technology, expectations, and market prices.
1. Start with the Seller's Decision
Supply is a seller's plan
A firm supplies a product when producing and selling an additional unit is worthwhile. It compares the market price it can receive with the additional cost of making that unit.
Why price matters
At a higher price, more units tend to cover production costs. At a lower price, only the least costly units may be worthwhile. This price-cost comparison is the foundation of supply.
Planned versus actual sales
Supply is a plan to sell, not necessarily the amount actually sold. Actual sales also depend on buyers' demand and on whether a market transaction occurs.
2. The Law of Supply
Law of supply
The law of supply says that, all else equal, a higher price leads to a higher quantity supplied, while a lower price leads to a lower quantity supplied.
Use ceteris paribus
All else equal means holding input prices, technology, taxes, expectations, and the number of sellers constant. This isolates the effect of the product's own price.
A cost-based explanation
Expanding output may require overtime, additional shifts, less productive equipment, or more costly inputs. Because later units can cost more to produce, a higher price is needed to make them worthwhile.
3. Read a Supply Schedule
What a schedule records
A supply schedule lists the quantity a seller is willing and able to offer at each possible price during a stated period. It connects price-quantity pairs.
Campus bakery schedule
At `$2`, the bakery supplies `20` loaves; at `$3`, `35`; at `$4`, `50`; and at `$5`, `65`. Higher prices are associated with larger planned quantities.
Interpret carefully
Each pair means: at this price, the bakery plans to offer this quantity. The schedule measures intended sales offers; it does not guarantee that customers purchase every unit.
4. Draw and Interpret the Supply Curve
Set up the axes
Place quantity supplied on the horizontal axis and price on the vertical axis. Each point represents one price-quantity pair from a supply schedule.
The curve's meaning
Connecting the points gives a supply curve. It shows quantities sellers plan to offer at different prices while other determinants of supply remain constant.
Visualize the slope
A typical supply curve slopes upward from left to right: start near the lower-left at low price and low quantity, then move upward and rightward as both price and quantity supplied rise.
5. Why the Entire Curve Can Shift
A shift changes every price-quantity plan
A change in the product's own price causes movement on one curve. A change in another determinant alters willingness or ability to produce at every price, shifting the whole curve.
Costs, technology, and policy
Higher input costs generally decrease supply, while lower costs increase it. Better technology usually increases supply. A per-unit tax tends to decrease supply; a subsidy tends to increase it.
Expectations and sellers
If storable goods are expected to sell for more later, sellers may withhold inventory now, decreasing current supply. More firms entering a market increase market supply.
6. Build a Market Supply Schedule
Try it: combine sellers
At a price of `$4` per smoothie, Seller A supplies `20` smoothies and Seller B supplies `35`. At a price of `$6`, Seller A supplies `35` and Seller B supplies `50`.
- Add the sellers' quantities at each price.
- State market quantity supplied at `$4`.
- State market quantity supplied at `$6`.
- Explain why you add quantities horizontally, rather than averaging them.
Check your work: Market supply is `55` smoothies at `$4` and `85` smoothies at `$6`. At a given price, market supply is the sum of all individual sellers' quantities. Averaging would describe a typical seller, not the total available to the market.
7. Movement Along a Curve vs. a Shift
Own-price change: movement
When strawberry price rises from `$4` to `$6` and other determinants are unchanged, farmers offer more. This is an increase in quantity supplied, shown by movement upward along the same curve.
Cost change: shift
When fertilizer becomes more expensive while strawberry price stays at `$4`, farmers offer fewer baskets at every price. This is a decrease in supply, shown by a leftward shift.
A reliable diagnostic
Ask what changed. A change in the product's own price changes quantity supplied. A change in a non-price determinant changes supply and shifts the entire curve.
8. Quick Check: Identify the Graph Change
Choose the most accurate description of the event.
The market price of reusable water bottles rises, while production costs, technology, and the number of sellers remain unchanged. What should a supply graph show?
- An increase in quantity supplied: movement upward along the supply curve
- An increase in supply: a rightward shift of the supply curve
- A decrease in quantity supplied: movement downward along the supply curve
- A decrease in supply: a leftward shift of the supply curve
Show Answer
Answer: A) An increase in quantity supplied: movement upward along the supply curve
Only the product's own price changed. Therefore sellers move to a different point on the existing supply curve, producing an increase in quantity supplied.
9. Review the Essential Terms
Flip each card, then try to explain the term using your own example.
- Law of supply
- Holding other factors constant, a higher price is associated with a higher quantity supplied, and a lower price with a lower quantity supplied.
- Supply schedule
- A list showing the quantity supplied at each possible price over a specified period.
- Quantity supplied
- The amount sellers are willing and able to offer at one particular price; an own-price change causes movement along a curve.
- Supply
- The complete relationship between price and quantity supplied; a non-price determinant changes it and shifts the curve.
- Market supply
- The total quantity supplied by all sellers at each price, found by adding individual quantities at that price.
10. Apply It: A Technology Upgrade
Use the distinction between a movement and a shift to analyze a business decision.
A furniture manufacturer adopts software that reduces wood waste and assembly time. The market price of tables does not change. What is the most likely effect?
- Quantity supplied decreases because tables are faster to make
- Supply increases because production costs fall at each output level
- Quantity supplied increases because the table price rises
- Demand increases because buyers prefer efficient factories
Show Answer
Answer: B) Supply increases because production costs fall at each output level
The software is a technological improvement that lowers production costs. At every possible table price, the firm can profitably offer more output, so the supply curve shifts right.
Key Terms
- supply
- The relationship between the price of a good and the quantities sellers are willing and able to offer, holding other determinants constant.
- input costs
- The costs of resources used in production, including labor, materials, energy, and equipment.
- supply curve
- A graph of the relationship between price and quantity supplied.
- law of supply
- The principle that, all else equal, quantity supplied rises when price rises and falls when price falls.
- market supply
- The combined quantity supplied by all sellers at each price.
- shift in supply
- A change in the entire supply relationship caused by a non-price determinant, such as input costs or technology.
- supply schedule
- A numerical list of quantities supplied at different possible prices.
- individual supply
- The quantity a single seller is willing and able to offer at each price.
- quantity supplied
- The amount of a good sellers are willing and able to offer at a particular price during a specified period.
- movement along the supply curve
- A change in quantity supplied caused only by a change in the good's own price.