The Law of Supply and the Supply Curve
Quantity supplied is the amount producers are willing and able to sell at a particular price during a specified period. Other things equal, a higher price normally increases quantity supplied: the law of supply.
Marginal cost shapes supply
Expanding output may require costlier equipment, overtime, or lower-quality inputs. A firm offers an additional unit only when price covers that unit's marginal cost. This produces a normally upward-sloping supply curve.
Turn reservation costs into a schedule
Suppose four lemonade units have marginal costs 4, 11. At a 7 the first three are offered; at $12 all four are offered. Higher prices cover progressively costlier marginal units.
| Price | Units with cost no greater than price | Quantity supplied |
|---|---|---|
| $3 | $2 unit | 1 |
| $7 | 4, $7 units | 3 |
| $12 | all units | 4 |
Market supply horizontally sums firms at the same price. Entry shifts market supply right; exit shifts it left. A linear equation such as is normally an approximation over a relevant range, not a literal claim at every imaginable price.
Light the bakery
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Supply means willingness to sell, not inventory. A warehouse may hold 100 units while its owner offers only 20 at a low current price. Market supply horizontally sums every seller's quantity supplied at each price.
KNOWLEDGE QUIZ
Which bakery orders should be accepted?
A bakery can produce four incremental batches with rising marginal costs. Each sells for the same price. There is a fixed daily rent of 6 that is unavoidable today; no other costs. At zero margin assume production occurs.
Marginal costs by batch: 2, 4, 7, 11. Compare prices 3, 7, 10 and 12.
- Find output at each price and construct the supply schedule.
- At price 7 calculate revenue, variable cost, contribution and profit. Would producing batch four help?
- Explain why rent affects profit without changing today's best output under these assumptions.