No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Four: Supply 92 might find in a local city (perhaps offered for sale on Craigslist). From our hypothetical example of a sabotage of AirPods production, prices of used AirPods could rise dramatically such that Javier, Megan, and Tonia are now suppliers. As we add up their individual supply curves we obtain the local market supply. The same observations we made with demand are appropriate here as well. There is no “Mr. or Ms. Market”; there are only individual suppliers (and demanders). But suppliers will only face the market demand curve, and demanders will likewise only face the market supply curve. In our limited example, the supply curve is very “chopped” in the stair-step graphical presentation, but as the size of the market increases the supply curve will tend to smooth out as with the other figures we’ve used in our text. The individual supply curves (as in Figure 4.2 ) can be added up to obtain an overall market supply. In the market supply curve, we typically do not see an area of decreasing costs as individual firms will expand production to obtain the gains from specialization and have increasing marginal costs. If a market is relatively large, firms that do not make the transition to the point where costs begin to increase will not be competitive. Figure 4.3 shows a typical market supply curve (which includes all individual supply curves). For another review of supply, watch this video fromMarginal Revenue University: As in our discussion of demand, we must remember that as we move up the supply curve, we cannot say that supply has increased, but rather the quantity supplied has increased. Changes in quantity supplied only occur with a change in price, which can only occur with a change in demand. Therefore changes in quantity supplied are due to changes in consumer behavior. Figure 4.3 simply represents how quantity supplied varies with price. Of course, as with demand, supply can and does change, as producer behavior changes. Let’s think about what might influence producers to change their supply. P ($) Q (#) S D 1 D 2 Figure 4.3, Notional Supply Curve. The supply curve always slopes upward, reflecting the increasing costs to provide additional units of a good or service (marginal costs). The vertical axis is price, the horizontal axis is the quantity of a good or service. As producers see increased prices (as the demand curve shifts, such as from D 1 to D 2 ) they will respond by supplying additional units of a good or service as the price exceeds their marginal costs of production. The arrows are intended to show that you can travel either direction on the curve as demand changes. The Supply Curve Quantity supplied: determined by the price of a good or service. According to the law of supply, there is a positive relationship between the price of a good or service and its quantity supplied.