Typically in economics, we learn about demand before supply, simply because it is easier to think like a consumer. Demand focuses on behaviors like buying things, and looking for low prices, and not purchasing as much when prices go up.
To fully understand the relationship between price and quantity for supply, you have to think like a supplier or a producer of something. Even if you are not a business owner, you have likely supplied your labor, so supply is definitely relevant in your life.
Supply refers to being able to produce something and willing to supply it at a price.
Here is a farmer's willingness to supply apples, detailed in a supply schedule. It shows the different prices of apples and the quantities that he is willing to supply at those different prices. This is similar to if we interviewed farmers and asked them how many apples they would supply at these prices.
|Price of Granny Smith Apples||Quantity of Granny Smith Apples Each Week|
We can plot these points on a graph, with the price on the y-axis and the quantity on the x-axis. You can see that as the price goes up, the farmer's willingness to supply increases. As the price falls, the farmer is supplying less.
This is a very different relationship between price and quantity than we have with demand. With demand, there is an inverse or negative relationship between price and quantity. With supply, the two variables are moving in the same direction, which is what we would call a positive relationship between price and quantity.
The law of supply says that if the price of a good decreases, the quantity supplied decreases. It works the other way as well, meaning if the price of a good increases, the quantity supplied increases. With supply, there is a positive or direct relationship between price and quantity.
So, why is a supply curve upward sloping? Why is there a positive relationship between price and quantity? Let's look at an example to explain the relationship.
These would include farmers in areas with ideal apple growing conditions, who would not have to pay for technology to make their land suitable for growing apples. Similarly, farmers in areas with relatively low labor costs, far from cities where the labor costs are much higher, would profit from growing apples.
However, as the market price of apples rises, it would become possible for more farmers to get into the apple growing business and make a profit, including those farmers who have to pay to make their land more suitable or pay more money for labor.
In addition, people in other lines of business might find it profitable to change over to apple growing, depending on the opportunity cost, or the value of what they are giving up.
Remember, the opportunity cost is defined as the sacrifice made by choosing one value or opportunity over another. It is the value of the foregone opportunity, and supply--someone's ability or willingness to supply something--definitely involves the opportunity cost of deciding to produce it.
Now, when discussing the law of supply, it is important to mention the phrase ceteris paribus, which means holding everything else constant.
As the price of apples falls, as mentioned, we can expect that farmers will produce fewer apples. However, this assumes that only the price of apples has changed. Nothing else has changed, such as the price of their resources or inputs, like fertilizer, or their technology.
So, when we have a change in price, you can see that there is movement along the supply curve.
As the price goes up, the farmers are supplying a greater quantity. As price falls, we move to a point lower and lower on the supply curve.
Because this is only involving a relationship between these two axes here, price and quantity, we do not need to draw a whole new supply curve. We can simply find which point is represented by each price and quantity combination.
This is a change in quantity supplied, not a change in supply itself. For instance, we would not say that the price of apples went up; therefore the supply increased. Instead, we would say that the price of apples went up, so farmers are willing to supply a greater quantity, or the quantity supplied increased.
This is known as movement along a supply curve, which is movement caused by a change in price, assuming all other variables are held constant, or the idea of ceteris paribus.
In another tutorial, we will discuss changes other than the price of the good itself that affect production decisions for a particular good, knows as a shift in supply. However, in today's lesson, we are focused on the fact that a change in price simply causes movement along the supply curve.
Source: Adapted from Sophia instructor Kate Eskra.