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Context

I am a beginner in microeconomics. I am trying to understand the demand-supply model. In my previous question (Supply curve of what?) I understood that supply curves exist for each product.

However, I did not understand why the supply curve is monotonically increasing. I post another one according to the one post, one question principle.

Question

As I understand it, the supply curve is the supplier's strategy that says, "If the price is p, I will supply f(p) units".

I think suppliers think: "The higher the price of the product, the fewer its sales, so I decrease the supply. The lower the price of the product, the more its sales, so I increase the supply."

Therefore, I think the supply curve is monotonically decreasing. What is wrong?

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1 Answer 1

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As I understand it, the supply curve is the supplier's strategy that says, "If the price is p, I will supply f(p) units".

This is only partly correct. Supply in general means supply of all firms not only 1 firm. Hence supply is the function that says:

"If the price is p, the $n$ suppliers will jointly supply $f(p)$ units. You could also work with firm specific supply curve and then what you say is correct.

I think suppliers think: "The higher the price of the product, the fewer its sales, so I decrease the supply. The lower the price of the product, the more its sales, so I increase the supply."

This is not correct. Actual observed sales are equilibrium result (i.e. result you get when demand and supply intersect). Actual sales on the market do not represent supply. Media commentators sometimes might refer to sales as supply, but this is incorrect and it is simply misuse of language.

Therefore, I think the supply curve is monotonically decreasing. What is wrong?

What is wrong is that you don't understand what "If the price is p, I will supply f(p) units" means.

Supply curve tells you for every price, how much would all suppliers would like to supply to the market not how much consumers will buy.

The reason why supply is typically monotonically increasing is that in every market there will be diverse suppliers who have different marginal costs of supply. For example, suppose we are talking about pokemon card resale market, and there are three potential sellers of the Pikachu card; Jasmin, Bob, Paula. Jasmin values her Pikachu card at \$10, Bob his card at \$15, Paula her card at \$20.

Hence, when price is 5 supply will be zero, when price is 10 supply will be 1 when price is 15 supply will be 2 when price is 20 supply will be 3.

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  • $\begingroup$ What about companies that manufacture and supply their own products? They can manufacture as much as they want to supply. f(p) = ∞? $\endgroup$
    – Dinosaur
    Feb 16 at 1:22
  • $\begingroup$ Correction. Since resources are finite, f(p) = ∞ is not possible. However, I do not believe that the equilibrium price corresponds to the manufacturing limit. I think they want and can supply more at that price but stop there because they cannot sell more. In other words, I think the equilibrium price is under the supply curve. $\endgroup$
    – Dinosaur
    Feb 16 at 2:27
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    $\begingroup$ @Dinosaur 1. $\infty$ is not a number, but concept, you could assume for some products that firm supply could potentially go to infinity if price is sufficiently large since some things like computer program can be easily produced in arbitrary large quantities, 2. However, $f(p)= \infty$ does not make sense that would imply that every possible price even 0 the production is always infinity which does not make sense, you could maybe say that $\lim_{p \to h} f(p) = \infty$ $\endgroup$
    – 1muflon1
    Feb 16 at 13:01
  • $\begingroup$ @Dinosaur 3. equilibrium does not correspond to manufacturing limit. I don't know where did you got that idea but its not generally or even most of the time true. This is only true in special cases. 4. By definition equilibrium price is price at which supply intersect demand, so the point defined by equilibrium quantity and price (point {$q^*,p^*$} must lie on the supply curve, or the point is not equilibrium point. $\endgroup$
    – 1muflon1
    Feb 16 at 13:06
  • $\begingroup$ In the Pokemon card example, if Bob can manufacture cards and the price is 15, how many will Bob supply? If the production cost is less than 15, he can supply as much as he wants. Hence, f(15) would be quite large in that case? $\endgroup$
    – Dinosaur
    Feb 16 at 14:36

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