Supply and Demand

The Law of Supply states that a positive relationship exists between an item’s price and the quantity that sellers are willing and able to offer, ceteris paribus. It describes how sellers (producers) react to pricing. Or more simply, that they tend to offer more for sale when prices go up and less when prices go down.

Look closely and you’ll see that supply is a relationship among the variables price (P) and quantity (Q). Different amounts will be offered at different prices. Therefore supply cannot be a single number. It makes no sense to say that a bakery will supply 5000 chocolate chip cookies per week. It depends. If the price of cookies drops, the baker will probably make less. If the price rises, he’ll make more. At some particular price he may produce and offer for sale a quantity of 5000 per week but at another price a different quantity would be supplied. The quantity supplied is a specific amount at a specific price but supply is a whole list of many different quantities at many different prices. Different prices simply move us up and down within the same list so while there is a change in quantity supplied there is no change in supply. Since supply is a relationship among variables and that relationship can be written down as a list of P’s and Q’s, we can also call it a supply schedule or supply function. Schedule is another name for list. And when the data from that list or schedule is plotted on a graph it becomes a supply curve.

Also notice that the Law of Supply contains the phrase ceteris paribus — other things remaining equal. Other things besides price can cause a seller to offer more or less than the supply schedule indicates. For instance, if the cost of making the product goes down they will probably make more of it. But they’re not making more because the price went down. The price didn’t change. They’re making more because something else made them want to make more. And that something else, of course, is profit. So if any of these other things change (other than price) the effect is to create an entirely new relationship between prices and quantities. Since the list itself has changed, supply has changed. The effect of a change in one of these other, non-price, determinants is to create a change in supply. On a graph, this new list will show up as an entirely new curve or line. Therefore a change in supply will shift the supply curve.