Supply Curve

Updated on January 31, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Supply Curve Definition

A supply curve is a graphical representation of the relationship between the number of products that manufacturers or producers are willing to sell or supply and the price of those items at any given time. While the price of the products is indicated on the X-axis, the quantity is plotted on the Y-axis when the other conditions affecting the elements remain constant.

what is Supply Curve

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Suppose a change occurs in the conditions that are expected to remain constant. In that case, the direct impact is observed on the supply curve, which fluctuates, changing the interrelation between the product price and quantity for that period.

Key Takeaways

  • In microeconomics, the supply curve is an economic model representing the relationship between the number of products supplied and their price.
  • The supply curve will be upward sloping, and there is a direct relationship between the price and quantity.
  • Perfectly inelastic, inelastic, unit elastic, elastic, and perfectly elastic are the types of the curve elasticity. 
  • Economists, governments, and manufacturers use it to understand consumer and market behavior. 

How Does The Supply Curve Work?

The supply curve works on the law of supply that states how the volume of the products supplied increases with the increase in their prices, given the ceteris paribus conditions, implying the factors affecting the elements remain unchanged. Normally, the curve moves upward towards the right as the product prices and the quantity in which it is supplied are directly proportional to each other.

Even a minute change in the factors would significantly impact the curves, causing a supply curve shift. The factors that determine how it would look include labor productivity, input costs, technology, producer expectations, government actions, and a number of producers. 

The figures to be plotted on the graph are obtained from the data gathered and recorded in the supply schedule. This schedule is the table consisting of the number of supplies and the quantity and price. 

The relationship between the price and volume of the supplied products for a given time can either be plotted for an individual supplier or the market as a whole. When the entire market scenario is depicted via this curve, it is referred to as a market supply curve.

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Shift In Supply Curve

When the shift moves towards the left, it indicates a decrease in the number of the products supplied. On the other hand, if the shift is towards the right, it signifies an increase. Let us consider two scenarios to understand how the change in the factors could impact the price-quantity curve:

Scenario 1

For the production of any consumer goodsConsumer GoodsConsumer goods are the products purchased by the buyers for consumption and not for resale. Also referred to as final products, examples of consumer goods include an Apple cellphone or a box of Oreo cookies. Consumer goods companies and the industry offer a vast range of products that heavily contribute to the global economy.read more, if the technology used for the process is good, the quality of products is sound. In this case, the supply curve will shift towards the right as there will be an increase in supply. 

 Graph 1

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An increase in product supply will mean increased sales, thereby more revenue generation for producers and manufacturers.

Scenario 2

In case the machinery and tools used for production malfunction, it will affect the number of products being manufactured for supply and have an impact on their quality.

Graph 2

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As a result, it will show leftward movement, indicating a decrease in the supplies with an increase in price.

Supply Curve Elasticity

While the curve mostly shows an upward slope, indicating the rise in the prices is directly proportional to the number of products supplied, the scenario is not always the same. Though, in most cases, the price increase leads to an increase in the volume of products supplied, the supply-price elasticitySupply-price ElasticityPrice elasticity of supply is a measure to identify how the supply of a particular product and service reacts with the change in the price. A higher price elasticity denotes that the producers and sellers of specific goods are highly sensitive to even the slightest changes or price fluctuations.read more might show diversions. This usually happens when the influencing factors don’t remain constant. 

supply Curve Price Elasticity

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The shifts, however, mark the curve’s elasticity, which can be of any form. When the curve is perfectly inelastic, the number of products supplied does not change with the increase in the price. As a result, the relationship is depicted through a straight vertical line.

If the curve is inelastic, the price of the products rises sharply at a pace faster than the rate at which the supply increases. Here, the graph shows a sharp upward slope. As a unit elastic form, on the other hand, the curve indicates an equally proportional rise in both the volume of product supplies and their price for that given period. Hence, a proportionate upwards slope is formed, indicating market equilibrium.

Next, there is an elastic curve, which marks the sharp increase in the supply of products faster than the pace with which their prices rise. Thus, the curve formed is the lower diagonal slope. Finally, the perfectly elastic curve signifies the change in demand for the goods in the market with the rise or fall of the product prices. As a result, the curve is a horizontal line.

Example

Let us consider the following supply curve example to understand how it works:

Based on a supply schedule, let us plot the price on the vertical axis and quantity on the horizontal axis.

Below is a schedule showing quantity (kgs) of coffee that a producer decides to supply at a given price:

Price ($)Quantity (Kgs)
505
607
759
9011
11013
13515
15018

Supply Curve Graphical Representation

Supply Schedule Graph

Demand Curve vs Supply Curve

The demand curve and supply curve are frequently studied to figure out the balance between the two elements. 

While the latter indicates the relationship between the product prices and the quantity of supplies for a given period, the demand curveDemand CurveDemand Curve is a graphical representation of the relationship between the prices of goods and demand quantity and is usually inversely proportionate. That means higher the price, lower the demand. It determines the law of demand i.e. as the price increases, demand decreases keeping all other things equal.read more shows how the product prices and the demand for those items are related.

While plotting figures for the supply and demand curve together on a graph, a downward slope for the former intersects with the latter at the equilibrium point. This shows that the demand for a product and its supply is the same.

supply Curve Graph 3

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Here, consumer surplusConsumer SurplusConsumer Surplus is the difference between the actual price that the customers pay for a product & the maximum price that they are ready to pay (for a single unit). You can calculate it by, Consumer Surplus = Maximum Price to be paid willingly – Actual Paid Price read more is the difference between the actual price that consumers pay for a product and the maximum cost of it they can bear.

Frequently Asked Questions (FAQs)

What is a supply curve?

The curve displays the relationship between the number of products producers or manufacturers are willing to supply and their prices. It is usually an upward slope, signifying the directly proportional effect of price on supply quantity, given the factors affecting the elements remain the same. However, if there is any change in the factors expected to be constant, the curve has a significant shift.

Why is the supply curve upward sloping?

The curve is upward sloping as it indicates the directly proportional relationship between the product prices and the number of products supplied. This means that if the price increases, the supply quantity will automatically increase, boosting the sale of those items and generating significant revenue.

What is the aggregate supply curve?

The aggregate curve denotes the total quantity of goods and services supplied at varied price levels. In short, the aggregate supply is considered with respect to the changing prices of the same set of products from time to time.

This is a guide to what is supply curve & its definition. Here we explain the shifts, elasticity, example, and its relationship with demand curve. You can learn more about investment banking from the following articles –

Reader Interactions

Comments

  1. Edwin Abucheri says

    Perfect

  2. Edwin Abucheri says

    You provide more and realistic content that can be understood perfectly.

  3. Baraka Misperes meshack says

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