Supply?

So, what is supply?

Let’s start at a very high level. With demand, we are thinking about consumers. We are thinking about people who want (demand) goods and services in the market. 

But consumers can’t make all these fancy goods and services themselves. They need a little help.

Supply is all about production. Supply is about firms (businesses, producers, it’s all the same here) producing the goods and services for consumers to, well, consume. 

“In a market, consumers demand goods and services, and firms supply the goods and services.”

But!

Because we’re doing economics, there’s always a but. In some markets, the roles are reversed. For example, in a labour market, individuals supply labour and firms demand this labour. So when we say consumers demand goods and services, and firms supply these goods and services, we are talking about a product market.

The Law of Supply

At different prices, firms will act in different ways. You might recall that at different prices, consumers will act in different ways. Generally, the higher the price, the lower the quantity that consumers demand.

Supply is the quantity of goods and/or services that firms in a particular industry are willing and able to sell at different price levels. For firms, there is a DIRECT relationship between price and quantity supplied.

What do I mean here? As price goes up, firms will wish to supply more to the market. 

Why? For two reasons. First, as price rises, firms realise that they can make more revenue if they sell more products (revenue = price * quantity sold). Second, as price goes up, more firms get the signal that they should produce more because they too could make more revenue as the price rises. 

The bottom line: as price rises, quantity supplied in a market will also rise. There is a direct relationship between the two variables.

Supply schedule and supply curve

The supply schedule sets out the level of quantity supplied at different price levels. It’s typically shown in a table, like the one below.

Hi, I’m a supply schedule.

We can then use the supply schedule to construct a supply curve. The supply curve is upward sloping because as price rises, so will quantity supplied. You can see this in the curve below: as the price rises from $1 per unit to $6 per unit, the quantity supplied will rise from 20 to 120 units.

A messy supply curve. Please, be neater.

The video below goes into more detail about the economic concept of supply.