Understanding How the Supply Curve Works

Overall, there are many factors that influence supply. In an ideal world, economists would have a good way to graph supply versus all of these factors at once.

01
of 06

Price Versus Quantity Supplied

In reality, however, economists are pretty much limited to two-dimensional diagrams, so they have to choose one determinant of supply to graph against quantity supplied. Luckily, economists generally agree that the price of a firm's output is the most fundamental determinant of supply. In other words, price is likely the most important thing that firms consider when they are deciding whether they are going to produce and sell something. Therefore, the supply curve shows the relationship between price and quantity supplied.

In mathematics, the quantity on the y-axis (vertical axis) is referred to as the dependent variable and the quantity on the x-axis is referred to as the independent variable. However, the placement of price and quantity on the axes is somewhat arbitrary, and it should not be inferred that either of them is a dependent variable in a strict sense.

This site uses the convention that a lowercase q is used to denote individual firm supply and an uppercase Q is used to denote market supply. This convention isn’t universally followed, so it’s important to always check whether you are looking at individual firm supply or market supply.

02
of 06

The Law of Supply

The law of supply states that all else being equal, the quantity supplied of an item increases as the price increases, and vice versa. The “all else being equal” part is important here, since it means that input prices, technology, expectations, and so on are all held constant and only the price is changing.

The vast majority of goods and services obey the law of supply, if for no other reason than it's more attractive to produce and sell an item when it can be sold at a higher price. Graphically, this means that the supply curve usually has a positive slope, i.e. slopes up and to the right. The supply curve doesn’t have to be a straight line but like the demand curve, it’s usually drawn that way for simplicity.

03
of 06

The Supply Curve

Start by plotting the points in the supply schedule on the left. The rest of the supply curve can be formed by plotting the applicable price/quantity pairs at every possible price point.

04
of 06

How to Find the Slope of the Market Supply Curve

Since slope is defined as the change in the variable on the y-axis divided by the change in the variable on the x-axis, the slope of the supply curve equals the change in price divided by the change in quantity. Between the two points labeled above, the slope is (6-4)/(6-3), or 2/3. Note that the slope is positive, as the curve slopes up and right.

Since this supply curve is a straight line, the slope of the curve is the same at all points.

05
of 06

A Change in Quantity Supplied

A movement from one point to another along the same supply curve, as illustrated above, is referred to as a "change in quantity supplied." Changes in quantity supplied are due to changes in price.

06
of 06

The Supply Curve Equation

The supply curve can be written algebraically. The convention is for the supply curve to be written as quantity supplied as a function of price. The inverse supply curve, on the other hand, is the price as a function of quantity supplied.

The equations above correspond to the supply curve shown earlier. When given an equation for a supply curve, the easiest way to plot it is to focus on the point that intersects the price axis. The point on the price axis is where the quantity demanded equals zero, or where 0=-3+(3/2)P. This occurs where P equals 2. Because this supply curve is a straight line, you can just plot one other random price/quantity pair and then connect the points.

You will most often work with the regular supply curve, but there are a few scenarios where the inverse supply curve is very helpful. Luckily, it is fairly straightforward to switch between the supply curve and the inverse supply curve by solving algebraically for the desired variable.

Sources

"x-axis." Dictionary.com, LLC, 2019.

"y-axis." Dictionary.com, LLC, 2019.