Supply

Supply is the willingness and ability of firms to produce and take their goods and services to market. We can map the relationship between supply, price and other variables using supply schedules which can be visualised through supply curves.

A supply curve, typically, slopes up from left to right.

Price and the quantity supplied are positively related. At higher prices producers will supply more.

Supply schedule

A supply schedule lays out what firms plan to supply over a range of prices.

Supply schedule

Supply curve

A supply curve can be derived from a supply schedule, and will tend to slope up from left to right.

Supply curve

Explanations of the upward slope

There are several explanations of why price and quantity supply are positively related, including:

Expectations of increased revenue

Higher prices encourage output because there is the expectation of higher revenue, which is price times quantity, and higher profit.

Of course, in reality this may not be the case as it depends on what is happening to other supply factors, and to demand. This reminds us that decisions to supply with respect just to price are 'hypothetical' - if all other factors remain constant (the ceteris paribus rule) then higher price will encourage more output as a result of its effect on expectations of profit.

We can see below that as price rises revenue (which is price times quantity) will also rise.

Supply and revenue

Increasing marginal cost

The marginal returns from adding more inputs to create more output tends to diminish. This means that (assuming factor inputs receive the same reward) the marginal cost of using more factors starts to increase. In this case, the firm will only be encouraged to increase output if the price of each unit increase.

Marginal cost

If we combine these two theories we get a convincing explanation of why firms will be prepared to supply more at a higher price.

Video on supply curves
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