Supply and the law of supply

In the same OpenStax table, sellers offer 500 million gallons of gasoline at $1.00 a gallon and 720 million at $2.20.

What supply means

Supply is the other side of a market. It is the amount of a good or service that producers are willing to make and bring to market at each price. For the seller, the price is what they receive for one unit. The quantity supplied is the total amount sellers would offer at one particular price, and a supply schedule and a supply curve show the quantity supplied at a range of prices.

The law of supply

This time the numbers move together. A higher price brings a larger quantity supplied. OpenStax lists what oil firms do when gasoline prices rise: they search harder for oil reserves, drill more wells, build pipelines, tankers and refineries, buy more trucks and open more filling stations or keep them open longer. A higher price makes all that extra effort worth paying for. This positive relationship is the law of supply, and it gives the supply curve its upward slope from left to right.

Just as with demand, keep the words apart. Supply is the whole curve. Quantity supplied is a single point on it. If the price of gasoline rises from $1.40 to $1.80, supply has not increased; the quantity supplied has risen from 600 to 680 million gallons along the same curve.

Reading the curve from the side

There is a second way to read a supply curve. Pick a quantity on the horizontal axis and go straight up to the curve. The price you reach is the lowest price at which sellers are willing to produce that much. OpenStax describes the price a firm asks as two parts added together: the cost of producing the unit at the margin, and the profit the firm wants. For a pizza shop the cost includes dough, sauce, cheese, the oven, rent and wages.

Now suppose cheese becomes 75 cents more expensive per pizza. To make the same number of pizzas the shop now needs 75 cents more for each one, so every point on its supply curve moves up by 75 cents. Read from the side, the curve moved up; read from below, at any given price the shop now offers fewer pizzas, so the curve moved left. Both descriptions are the same shift. Higher costs shift supply to the left, and lower costs shift it to the right.

Why supply curves differ

Supply curves have different shapes. Some are steep: the quantity barely changes when the price moves, perhaps because factories are already running at full capacity or because a crop takes a year to grow. Others are flat: a small rise in price brings a flood of extra output, which is typical when production is easy to expand. In the gasoline table the curve gets steeper at higher prices. From $1.00 to $1.20 the quantity rises by 50, but from $2.00 to $2.20 it rises by only 20.