Supply

    As with Demand, as I proceed I will point out common errors to avoid.  And as with Demand, a key point to remember about supply and quantity supplied is that they refer to desires, not actions; they refer to what firms want, not to what they actually do.

    The QUANTITY SUPPLIED at any given price is how much firms want to sell at that given price.  E.g., in the widget market, the quantity supplied at a price of $10/widget might be 900 widgets.

    Error:  Confusing the quantity supplied with the quantity sold.
    If the quantity supplied at $10/widget is 900 widgets, how many widgets are sold at that price?
    I don't know!  If buyers only want to buy 750 widgets at $10/widget, then the quantity sold will be 750, not 900.  All we can say is that the quantity sold won't be more than 900.

    There is a different quantity supplied for each price.  For example:
 
 
price quantity supplied
$5 775 widgets
$6 800 widgets
$7 825 widgets
$8 850 widgets
$9 875 widgets
$10 900 widgets
The supply of widgets

    This table, giving the quantity supplied at different prices, shows the SUPPLY of widgets.

    Error:  Confusing supply with quantity supplied.
    The quantity supplied is how much consumers want to buy at a PARTICULAR price.  The supply is a schedule showing how much firms want to sell at ANY given price; i.e., the supply is a schedule showing the quantity supplied at any given price.  The table above, in its entirety, shows supply; each row of the table shows the quantity supplied at a particular price.

    Error:  Confusing a change in quantity supplied with a change in supply.
    Say the price starts at $7, where quantity supplied is 825 widgets.  Then the price falls to $5.  We say that the quantity supplied has decreased to 775 widgets.  We do not say that supply has decreased, because it hasn't; the table representing supply is still the same, we've simply moved to a different row, i.e., a different quantity supplied.
    On the other hand, suppose that the invention of cold fusion makes widgets cheaper to produce.  Suddenly, firms are willing to sell more widgets for ANY given price:
 
 
price old quantity supplied new quantity supplied
$5 775 widgets 825 widgets
$6 800 widgets 850 widgets
$7 825 widget 875 widgets
$8 850 widgets 900 widgets
$9 875 widgets 925 widgets
$10 900 widgets 950 widgets
The supply of widgets, before and after firms' costs fall

    Before, whenever the price was $8, firms wanted to sell 850 widgets; now, at $8 the quantity supplied is up to 900 widgets.  Similarly for all the other prices.  We call this situation an increase in supply:  Supply increases if the quantity supplied at each price increases.  So a change in quantity supplied occurs when we move to a different row of the table; a change in supply occurs when we move to a different table.

    I've made and explained a couple definitions.  Now we're ready to state a fundamental principle of economics:
    The Law of Upward Sloping Supply:  If the price increases, with all other factors held constant, then the quantity supplied rises.
    I.e., the higher the price, the more firms want to sell.
    There are some fancy theoretical and empirical "proofs" of this law, but for now I'm not going to try to convince you that it's true.  We're just going to assume it; I trust you find it convincing.  Surprisingly, this one law, or assumption, has some powerful implications.  And when we combine it with the law of Downward Sloping Demand, we're really rocking.

           For another, more detailed treatment of supply, see Chapter 5, and then Chapter 9,of David Friedman's Price Theory.
 

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This page maintained by Steven Blatt. Suggestions, comments, questions, and corrections are welcome.