Basic Economics: The Supply curve

This week we will be discussing the basis of market operations, the supply curve. Next week we will be discussing the demand curve and then put it all together in the following week. Once you can understand the basis of market operations, every transaction in your daily life will make more sense.

The Supply Curve demonstrates the relationship between the quantity of a good that producers are willing to sell and the price of the good. As price rises a larger quantity will be produce, or as price drops, a lower quantity will be produced as suppliers may go out of business or find that venture unprofitable. However, this is much easier to talk about with a graph, as you can see below.

The supply curve, labelled S in the graph above, shows how the quantity (Q) of a good changes as the price (P) changes. The supply curve is upward sloping; the higher the price, the more firms are able and willing to produce and sell. The alternate is also true as you can see in the graph on the left. The P and Q can shift to P1 and Q1, moving along the curve from A to B, or B to A.

However, the curve can also shift as you can see in the graph to the right. This can be caused by many different reasons, for example if production costs fall, firms can produce the same quantity at a lower price or a larger quantity at the same price. This causes a shift from the curve S to S1.

I find the operation of the supply curve to be very intuitive. It is a pictorial depiction of processes that go on around all of us all the time. I hope this explanation made this process more clear. If you need a more detailed explanation or have an idea for a blog topic please email illuminatingfinance@gmail.com.

Enjoy your week!