Supply
Just as demand is a relation between price and quantity demanded, supply is a relation between price and quantity supplied. Supply indicates how much producers are willing and able to offer for sale per period at each possible price, other things constant. The law of supply states that the quantity supplied is usually directly related to its price, other things constant. Thus, the lower the price, the smaller the quantity supplied; the higher the price, the greater the quantity supplied.
Just as demand is a relation between price and quantity demanded, supply is a relation between price and quantity supplied. Supply indicates how much producers are willing and able to offer for sale per period at each possible price, other things constant. The law of supply states that the quantity supplied is usually directly related to its price, other things constant. Thus, the lower the price, the smaller the quantity supplied; the higher the price, the greater the quantity supplied.
The Supply Schedule and Supply Curve
Exhibit 3 presents the market supply schedule and market supply curve S for pizza.Both show the quantities supplied per week at various possible prices by the thousands of pizza makers in the economy. As you can see, price and quantity supplied are directly, or positively, related. Producers have a profit incentive to offer more at a higher price than at a lower price, so the supply curve slopes upward. There are two reasons why producers offer more for sale when the price rises. First, as the price increases, other things constant, a producer becomes more willing to supply the good. Prices act as signals to existing and potential suppliers about the rewards for producing various goods. A higher pizza price attracts resources from lower-valued uses. A higher price makes producers more willing to increase quantity supplied.
able to increase the quantity supplied. A higher price makes producers more able to increase quantity supplied. As a case in point, a higher price for gasoline increases oil companies’ ability to extract oil from tar sands, to drill deeper, and to explore in less accessible areas, such as the remote jungles of the Amazon, the stormy waters of the North Sea, and the frozen tundra above the Arctic Circle. For example, at a market price of $50 per barrel, extracting oil from tar sands is unprofitable, but at a price of $55 per barrel, such production is profitable.
Thus, a higher price makes producers more willing and more able to increase quantity supplied. Producers are more willing because production becomes more attractive than other uses of the resources involved. Producers are more able because they can afford to cover the higher marginal cost that typically results from increasing output. On the other hand, a lower price makes production less attractive, so suppliers are less willing and less able to offer the good. For example, a mining company “reacted quickly to steep copper price declines in 2008 by curbing production at its North American sites and implementing layoffs at its mines and corporate headquarters.”
Thus, a higher price makes producers more willing and more able to increase quantity supplied. Producers are more willing because production becomes more attractive than other uses of the resources involved. Producers are more able because they can afford to cover the higher marginal cost that typically results from increasing output. On the other hand, a lower price makes production less attractive, so suppliers are less willing and less able to offer the good. For example, a mining company “reacted quickly to steep copper price declines in 2008 by curbing production at its North American sites and implementing layoffs at its mines and corporate headquarters.”
As with demand, we distinguish between supply and quantity supplied. Supply is the entire relationship between prices and quantities supplied, as reflected by the supply schedule or supply curve. Quantity supplied refers to a particular amount offered for sale at a particular price, as reflected by a point on a given supply curve. We also distinguish between individual supply, the supply of an individual producer, and market supply, the sum of individual supplies of all producers in the market. Unless otherwise noted, the term supply refers to market supply.
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