Supply Curve

Supply Curve Definition

In microeconomics, the supply curve is an economic model that represents the relationship between quantity and price of a product which the supplier is willing to supply at a given point of time and is an upward sloping curve where the price of the product is represented along the y-axis and quantity on the x-axis.

Based on the law of supply, It is based on ceteris paribus, that is, other variables remaining constant, the supply curve will be upward sloping and there is a direct relationship between price and quantity of a product. Other variables include technological advancement, availability of resources, number of sellers, different consumers, level of production, etc. Whenever there is a change in variables, the curve will either shift right or left depending upon its impact.

 Example 01

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Source: Supply Curve (wallstreetmojo.com)

Shifts in Supply Curve

Example #1

When there is technological advancement, there are better seeds testing methods that will produce quality cultivation. In this case, the supply curve will shift towards the right, that is, there is an increase in supply. Another example would be the decline in the input cost of materials used for the production of the final product.

 Example 02

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Example #2

In an event when there is drought, the crops are affected. In such case this curve shifts towards the left which mean a decrease in quantity and increase in price. Another example would be subsidy provided by governments to boost agricultural production, in such cases also the supply curve would shift towards the right.

Supply-Curve Example 03

Supply Curve Example (with Graph)

A supply schedule is a table which shows the different quantity supplied at different prices by the producer. Based on this schedule, It is represented in a graph with price on the vertical axis and quantity on the horizontal axis.

Below is a schedule showing quantity (kgs) of coffee that a producer is willing and able to supply at a given price ($)

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

Supply Curve Graphical Representation

Supply Schedule Graph

Uses of the Supply Curve

It is used to understand 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. Consume r explains the difference between the price of the product that a consumer is willing to pay and the price that he actually pays.

Supply-Curve Example 04.1

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The above graph represents 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 (red line) and the supply curve (green line) with “quantity” across the x-axis and “price” along the y-axis. The demand curve is a downward-sloping curve, which means that as the price of the product increases, its demand falls (other factors remaining constant). On the other hand, It is an upward sloping curve which means as the price of a product increases, it supplies also increases (other factors remaining constant). As per the law of demandLaw Of DemandThe Law of Demand is an economic concept that states that the prices of goods or services and the quantity demanded are inversely related when all other factors remain constant. In other words, when the price of a product rises, its demand falls, and when its price falls, its demand rises in the market.read more and supply, the intersection (point S) where both the curves meet is known as equilibrium or market price. The market priceMarket PriceMarket price refers to the current price prevailing in the market at which goods, services, or assets are purchased or sold. The price point at which the supply of a commodity matches its demand in the market becomes its market price.read more is the price the consumer is willing to pay for a given quantity of goods or services.

It is used by economists, governments, and manufacturers to understand the consumer and market behavior and helps them analyze how the economy is performing and what policies and changes can be made to boost the economy. The research and data are collected to form patterns according to the economic environment. The producers/manufacturers use the supply curve to understand the requirement as per market conditions which also helps them in the pricing of input and output products.

This has been a guide to what is the supply curve and its definition. Here we discuss an example of a supply curve shifts along with uses and graphical representation. You can learn more about investment banking from the following articles –

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