Define market supply curve. What are the principles of it?

The market supply curve is a graph that describes the supply of a good that all companies on the market are willing to produce at specific prices. The price is an independent variable, while the supply is a dependent variable. The curve is upward sloping because, at higher prices, more companies enter the market, and they produce more goods.


An individual firm can create a certain amount of product that it can sell for certain prices. If we assume that the firm is a perfect competitor, which means that it does not influence the prices, its supply is dictated by the prices. That is true, however, up to a certain point, because it is impossible to increase the amount of product indefinitely. Firstly, it may not always be economically viable, because producing more usually costs more. Secondly, it may not be physically possible, as any given business has a finite number of employees, production equipment, and time.

If we plot a graph, where the price of a product is an independent variable y, and the amount of goods the company is willing to produce is the dependent variable x, it will look like an upward slope. For example, a company is ready to produce a thousand copies of a comic book if it costs $10 because making a larger number would cost more than the company can gain in revenue, but making less would be leaving potential profits on the table. If the book costs $20, the company would be able to create two thousand copies, following the same logic. However, if the book costs $50, the company would only go as high as 2500 copies, because, to make more, it would have to hire more employees and run printing presses at night, which costs more, and places additional strain on the equipment. Thus, we can imagine a slope that is horizontal in the beginning but appears more vertical by the end.

A different company can produce a different amount of comic book at these price points, because, logically, all companies have different equipment, different employees, and different business processes. If we sum up the supply of all the printing companies in the market, the resulting graph is what is called a market supply curve. It follows the same rules: the higher the prices, the more copies are produced because it is profitable.

Different goods and services, however, follow different rules. There are goods the production of which can be scaled very well, which would make the curve look like a straight upwards line. However, if the output is difficult or impossible to scale regardless of the price per unit, the line would be almost perfectly vertical. This phenomenon is called supply elasticity. The more elastic the supply, the easier it is to scale, the flatter the curve.

There is an opposite curve, which is the market demand curve. Imagine a household that is in the market for comic books. At $50 per issue, they are willing to purchase one comic book per given period. However, at $10 per issue, they are ready to buy five books. Their neighbors, who would not even consider purchasing a book at $50, would buy two if they cost $10 per issue. The principle is the same: combining all the potential customers in the market creates a downward slope. The point where the market supply curve and market demand curve intersect is called equilibrium. At the equilibrium price, the number of books produced satisfies the demands of the customers and is perfectly profitable for the sellers. Naturally, this occurs in a perfect competition, which is only a theoretical concept in economics. Real-life markets are infinitely more complicated than that.

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