See Changes in Supply

Transactions require both buyers and sellers. Thus, demand is only one aspect of decisions about prices and the amounts of goods traded; supply is the other.

Supply refers to the quantity of a specific good that sellers will provide under alternative conditions during a given period.

One critical condition is that producers must expect to gain (added profit) by selling their outputs or they will refuse to incur production costs. This section outlines some influences on firms' decisions to produce and sell.

 

The Law of Supply

Producers' decisions about the amounts to sell yield the law of supply.

The law of supply: All else equal, higher prices induce greater production and offers to sell more output during a given period, and vice versa.

The law of supply occurs, in part, because higher prices provide incentives to expand production. More importantly, attempts to expand output ultimately succumb to diminishing returns; increasing costs occur when returns diminish because, as larger numbers of costly "doses" of resources are applied, output may grow, but less than proportionally[1]. When this happens, higher prices are needed to induce suppliers to produce and sell their goods.

The Supply Curve

Just as the law of demand yields negatively sloped demand curves, the law of supply generates positively sloped supply curves.

A supply curve shows the maximum amounts of a good that firms are willing to furnish during a given time period at various prices.

A different perspective views the same supply curve as showing the minimum prices that will induce specific quantities supplied.

            The positive slopes of supply curves reflect eventual increases in costs per extra unit when output grows because firms: (a) ultimately encounter diminishing returns; (b) may be forced to pay overtime wages for extra hours; or (c) successfully attract more labor or other resources only by paying more for them. Working closer to capacity also causes more scheduling errors and equipment breakdowns. Such problems raise costs when firms increase output.

            A typical supply curve and schedule are shown in Figure 7. Dell will produce and sell 40 million paperbacks annually at $6, but only 10 million books if the price falls to $3.

A supply price is the minimum price that will induce a seller to increase production beyond its current level.

For example, if Dell were selling 9 million books annually at a price of $2.95, the market price would have to grow to Dell's supply price of $3 (point a) before annual production would be expanded to 10 million books.

    Market demand curves horizontally sum individual demands. Similarly, market supply curves entail horizontally summing all firms' supply curves. Figure 8 assumes only two firms in the book market, Dell and Bantam. At $3, Dell will produce and sell 10 million books, and Bantam, 15 million, making the annual quantity supplied 25 million books, and so on. The law of supply asserts that quantities supplied per period are positively related to prices; as a good's price rises, the quantity supplied grows.

  Influences on Supply

Just as several types of determinants influence demands, the market supply of a good depends on several broad influences other than its own price. A supply curve reflects the positive relationship between price and quantity supplied per period, holding constant: (a) technology; (b) resource costs; (c) prices of other producible goods; (d) expectations; and (e) the number of sellers in the market and (f) taxes, subsidies, and government regulations. The supply curve shifts when there are changes in any of these influences, which operate primarily by altering the opportunity costs of producing and selling.

Changes in Quantity Supplied vs. Changes in Supply

A change in supply occurs only when the supply curve shifts. A change in the quantity supplied (movement along the curve) is caused only by a change in the price of the good in question. Consider an adjustment in quantity supplied caused by a change in the market price. The supply curve stays constant because it is defined by the entire relationship between price and quantity. A change in supply (caused by a change in a determinant other than a good's own price) shifts the supply curve because this price/quantity relationship is altered. (You will appreciate why this distinction is not trivial after we combine supply and demand curves in a market.) Figure below summarizes categories of influences that shift supply curves.

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