The Power of the Supply Curve: A Visual Guide
The supply curve illustrates the relationship between the cost of a product or service and the quantity of it that is available. It is displayed on a graph with the price on the vertical axis and the quantity supplied on the horizontal axis.
The supply curve serves as a visual demonstration of how the dynamic between supply and demand operates. Prices increase when supply is low and vice versa.
Key Insights
- A supply curve can often show if a commodity will experience a price increase or decrease based on demand, and vice versa.
- The supply curve is shallower (closer to horizontal) for products with more elastic supply and steeper (closer to vertical) for products with less elastic supply.
- The supply curve, along with the demand curve, are the key components of the law of supply and demand.
Discover How the Supply Curve Works
The supply curve typically rises from left to right, illustrating the law of supply: As the price of a given commodity increases, the quantity supplied will increase (all else being equal).
Note that in economics, price is treated as the independent variable, and quantity is the dependent variable, although in most disciplines, this is usually reversed.
If a factor other than price or quantity changes, a new supply curve is required. For instance, if more soybean farmers enter the market, increasing land for soybean cultivation, more soybeans will be produced even if the price remains the same, shifting the supply curve to the right.
Technological advancements, changes in production costs, or substitutions of crops can also shift the supply curve.
Real-World Example: Supply Curve
If the price of soybeans rises, farmers will likely plant fewer corn crops and more soybeans, increasing the total quantity of soybeans on the market. The degree to which rising prices lead to higher quantities is called supply elasticity.
For example, a 50% increase in soybean prices causing a 50% increase in quantity supplied indicates a supply elasticity of 1. If the quantity supplied only increases by 10%, the supply elasticity would be 0.2.
Products with more elastic supply have shallower curves, while those with less elastic supply have steeper curves.
Additional Considerations
The terminology surrounding supply can be perplexing.
Related Terms: demand curve, law of supply, equilibrium, production costs, technological progress, disposable income, substitutes.
References
- LibreTexts. “Economics: 6.3: Price Elasticity of Supply”.
