Supply In The Competitive Market by Omkar Abhyankar

 In the previous article we discussed the concept of demand in a competitive market. In this article, we will focus on the concept of supply in a competitive market. Supply is the amount of a good or service that sellers are willing to supply in the market based on various prices. It is important to note that a seller can only determine how much of a good or service to supply in the market while they cannot determine the price of their goods or services. Supply relates the price of a good or service with how much quantity of the good or service is supplied. We will notice that the price of a good or service and the quantity supplied of a good or service is proportional meaning that an increase in price will also lead to an increase in the quantity supplied of a particular good or service in the market. This is because thinking logically, if the price of a good or service was to increase, then a firm would receive more profit from that good or service and as a result, they would supply more of that good or service. This proportional relationship is defined by a law known as the Law of Supply. Let’s take a look at how supply can be graphed to better understand this proportional relationship as stated by the Law of Supply.

This graph models the supply of the competitive market for chairs. On the Y axis we have the price of each chair. On the X axis we have the quantity of chairs supplied in the market. On the graph, we have a line called the “supply curve”. Let’s understand why this curve is upwards sloping. At Point A, we see that each chair costs only $10. Since the price of each chair is low, firms will not make much profit from chairs and therefore will only supply 5 chairs. Now let’s suppose that the market price for chairs changes to $50 as represented by Point B on the supply curve. Now since the price of chairs is very high, firms can earn a larger profit from selling chairs. Therefore from our curve we can see that the firm will sell a large value of 90 chairs. As we can see, as the price of chairs in the market increases, the quantity of chairs supplied also increases. The supply curve is upwards sloping to model this proportional relationship between the price and the quantity of chairs supplied. As we just saw, price changes can occur and could influence how much a producer will supply its good or service. In the next article, we will take a look at how the entire supply for a good or service can change and understand the possible causes for these changes.