So here's an example of a standard Supply & Demand Relationship for an Individual Supplier:

As a supplier, for 1 dollar, I'll produce 1 unit of something. For 2 dollars, I'll produce 2 units, for 3 dollars, I'll produce 3 units, and so on and so forth up until 10 dollars for 10 units.

At 1 dollar, I'll have 10 buyers, at 2 dollars, I'll have 9 buyers, at 3 dollars, I'll have 8 buyers...all the way up to having 1 buyer at 10 dollars.

As you can see, there's an inverse relationship with the equilibrium price being right in the middle: Producing 5 units with 5 buyers buying each of them at 5 dollars per unit. Simple...

But now I'm wondering what would happen if there was a surplus. Ideally I should've made 5 units at 5 dollars each and sold them all to 5 buyers. But let's say I make 6 units, thinking I'll be able to sell all of them for 6 dollars each, but I only end up selling 4 of them to 4 buyers. If I wanted to sell all 6, I would have to sell them at 4 dollars each to reach equilibrium. The problem is if I sell 6 of them for 4 dollars each, I'll make less money than I would selling only 5 of them for 5 dollars each.

So do I reduce the price to 4 dollars so I can sell all 6 of them, making 24 dollars? Or do I sell 5 of them at 5 dollars each, making 25 dollars, and then sell the remaining one for less money?

Thanks in advance for answers.

  • $\begingroup$ As a supplier, you supply, you do not necessarily produce. Is your "surplus" (stock) worth something to you? If yes, you can add that information to your supply function. $\endgroup$ – Giskard Nov 4 '19 at 20:24

A supply curve is typically derived from a cost function, and you're leaving out some important costs such as storage and depreciation, which would help relieve some of the seeming counter-intuitiveness around a supplier choosing to "sell more at a loss" compared to selling less.

  • $\begingroup$ So would my solution be to sell at the equilibrium to maximize profit but then sell the surplus left over at a lower price? If not, how would I go about maximizing profit when I produce more than demanded on the market? I know there's more variables and intricacies but I just want to know the simplest scenario $\endgroup$ – Anthony Fallone Nov 4 '19 at 22:22
  • $\begingroup$ The glib answer is that you wouldn't produce a surplus. The slightly-less glib answer is that these models are best viewed as representing activity within a period (day, week, month etc.). In this period, supply is inefficiently high and so as a producer you must either bear a lower market price or pay the costs of deferring some sales to the next period (storage, depreciation, risk of exogenously lower demand, etc). In the next period, this revenue penalty will motivate you to better predict demand, and produce accordingly. Make sense? $\endgroup$ – heh Nov 4 '19 at 22:29
  • $\begingroup$ I should note for the sake of nitpickiness that we're ignoring some important mechanics around whether the market in question is perfectly competitive or monopolistic. The language we're using is imprecise here, but I think the point of your question really is one around how firms learn their markets. $\endgroup$ – heh Nov 4 '19 at 22:31
  • $\begingroup$ Just focusing on an individual supplier so this would either be in a monopolistic market or competitive market where this supplier is offering the lowest prices. What would be the cost of me selling the one left over unit during the next day, week, or month? Still can't grasp why I can't just sell the last remaining unit for less money instead of cutting the price of all of them $\endgroup$ – Anthony Fallone Nov 4 '19 at 22:51
  • $\begingroup$ Honestly, this is where math can help you out. If you're coming at this from an Econ 101 perspective, there's usually no time element to those models. I sense that your struggle is coming from the real-world observation that firms have "sales" to liquidate excess inventory. Your intuition is telling you that this is a valid way for firms to handle over-production, and your intuition is correct. $\endgroup$ – heh Nov 4 '19 at 22:57

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