7/3/11

How to make a supply curve, derivation of a supply curve given a supply schedule


A supply schedule and a supply curve are two different representations of the same thing.  They show the quantity that will be supplied at different price levels.  Supply schedules can be written for both individual firms, as well as for the entire market.  The only difference between the two would be the total quantity supplied at each price.  Supply curves are always upward sloping, meaning as prices get higher, firms are willing to supply more of the good.  This should make sense, imagine if you were in charge of your own business, you would want to sell more stuff if the price was higher wouldn’t you?  The only exception to this rule is
a natural monopoly where costs go down as quantity produced goes up (this is due to increasing returns to scale and make up less than 1% of all possible firms).

Now we will start with a typical supply schedule.  In order to be consistent with prior posts, we will look at the market for jeans.  The two columns show the quantity of jeans that will be supplied at certain price levels.

Supply schedule for jeans
Quantity
Price
0
0
20
10
40
20
60
30
80
40
100
50

We can take each of these data points and plot them on a graph to give us a visual representation for our supply.  By simply plotting these six points on a graph we are on our way to graphing supply.

 

After we get the points down, we can connect the dots to complete the supply curve.  The reason we can connect the dots like this is because the curve is linear, meaning that the slope is constant.  If you look at the supply schedule again, you can see that for every $10 the price goes up, the firm decides to supply 20 more jeans.  Since this trade off is consistent through the whole schedule, we know that the supply curve is linear.

 

So we have gone over what two different ways to represent a supply curve, in table and graphical form.  Both of these forms consist of the same information, they are just shown in different ways.  The thing to remember about supply curves is that they are upward sloping.  The trick to remembering this is that higher prices mean you produce more.  Think of it in terms of revenues or profits, if you are going to make more money, then you want to sell more.  Under what circumstances would you want to sell more if the price was lower?  Not very many…


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