Supply and Demand

Supply

Supply is the amount of a good that producers are willing to offer for sale at a range of different prices.

Supply is the total amount of a specific good or service that is available to consumers. Supply describes the behavior of producers in a market. Just as consumers may choose to buy different levels of goods at various prices, producers also may choose to supply goods and varying prices. Producers choose the quantity of the goods they will supply, given the market price, based on many factors, including the costs of production.

A supply schedule is a table showing the quantity supplied of a good at different prices and can also be used to show the minimum price the producer is willing to sell. Different producers may be able to offer different quantities of an items at the same price based on input costs differences or technology.

For example, consider a market with three producers: Dawn Donut, Sweet Kings, and Sprinkle Sugar. They each supply donuts, but each has different costs, and therefore a different willingness to supply donuts at each prevailing price. Donut prices range from $1 to $5. At a price of $2, Dawn Donut sells 6 donuts, Sweet Kings sells 10 donuts, and Sprinkle Sugar sells 2 donuts. The number of items supplied by all three producers together is the market supply, which, at $2, is 18.
6+10+2=18donuts6\;+\;10\;+\;2\;=\;18\;\mathrm{donuts}
Just as market demand is the sum of the quantity demanded of all buyers, market supply is the sum of the quantity supplied of all sellers.

Supply of Donuts

Price Dawn Donut's Supply Sweet Kings's Supply Sprinkle Sugar's Supply Market Supply
$1 4 5 0 9
$2 6 10 2 18
$3 8 15 4 27
$4 10 20 6 36
$5 12 25 8 45

The supply schedule for donuts shows the quantity of donuts supplied at different prices for each producer.

Supply Curve

A supply curve links combinations of prices and quantities supplied for a specific seller or market.

A supply curve is a line on a graph joining different combinations of quantities supplied and prices. It shows the range of combinations of prices and quantities supplied. A change in quantity supplied is shown by movement along the supply curve, to the right or the left, the right noting an increase while the left represents a decrease. As with the demand curve, price is shown on the vertical axis, and the quantity supplied is on the horizontal axis. However, there is traditionally a direct or positive relationship between price and quantity supplied, thus the supply curve typically has a positive slope.

As the price of a good rises, other factors held constant, producers are willing and able to offer a greater quantity of that good for sale. As the price falls, producers are willing to supply less of that good. One of the factors that can be held constant, for example, is the cost of production of the good, or the amount of money needed to make a product. For instance, it typically costs the same amount of money to make one wooden chair. When the price is below the cost of production, producers will not want to offer the good for sale because they would incur a loss. If it costs $10 to make a flash drive and the going rate for a flash drive on the market is $8, the cost of production is more than the price. As the price rises above the cost of production, producers can make a profit and so will be willing to make and sell the good.

If the prices of alternative products are also held constant, producers will want to sell more of the good because the price increase makes it more profitable to offer the good for sale than these alternatives. The shape of the supply curve is therefore upward-sloping.

Supply Curve

The supply curve (S) shows the quantity of a product producers supply at each possible price. The curve shows the direct relationship between price and quantity supplied: when price is higher, the quantity supplied is higher.

Quantity Supplied

Quantity supplied is the quantity of a good that producers offer for sale at a specific price.

It is important to distinguish between supply—the entire range of combinations of goods offered for sale by producers and prices, as shown on a supply curve—and quantity supplied, or the quantity of a good or service that producers offer for sale at a specific price. Assuming a loaf of bread sells for $4, suppliers would be willing to provide 6 loaves to the market. If the price of the same loaf goes down to $2, the same producers are only willing to supply 2 loaves. The quantity supplied is different at each price point. A change in quantity supplied is shown as a movement along a stationary supply curve from one point to another. All other factors that influence producers’ selling decisions are held constant. This is called ceteris paribus.

A change in supply, in contrast is shown by a shift of the whole curve. Supply can change for a variety of reasons, a change in the price of input goods, technology, expectations, or the number of sellers. Supply relies on factory production as well as business choices that are made by corporations.

Law of Supply

The law of supply states as the price of a good rises, the quantity supplied will increase.

The law of supply, an economic law, states as the price of a good rises, the quantity supplied will typically increase, ceteris paribus. When the price of a good falls, the quantity supplied will fall. There is usually a positive or direct relationship between price and quantity supplied. For instance, if the price of avocados rises from $2 to $3, the quantity supplied will increase. This means that movement will happen along the supply curve, the line on a graph showing the relationship between supply and price.

Producers in a competitive market sell different quantities at different prices in order to maximize profit. This happens because producers have different costs of production. In general, as prices rise, producers will sell more units, because they receive more revenue by doing so. In contrast, if prices fall, producers will sell fewer units, and may even shut down, leaving the market entirely. When prices rise again, they can reenter the market.