Supply
So what do I mean by supply and demand? Many people will be familiar with the graph below. It is a graph of the relationship between price and quantity in a market for a specific good. The blue line represents the demand for that good by all the consumers in that market. The red line represents the supply for that good by all the producers of that good in that market.
A few things to note:
Supply
As stated above, the red line represents supply of a specific good in a market. The line can be straight or curved, but most importantly, it slopes upwards. This means that the supply of a good into a particular market is more costly as more is supplied. (Note: the graph refers to a given time period, so improvements in productivity are not reflected in the graph, but rather in the change of the position and slope of the supply curve across two time periods and therefore two graphs.)
Think about the supply of oranges. I can supply all the oranges that grow on trees within arms reach relatively cheaply. I move from tree to tree collecting this low hanging fruit. However, once this fruit has been picked, to supply any more oranges will require me to work harder.
I could climb the tree and collect oranges, but I will be picking a lot less in any time period than when I was picking them from ground level. This means I have to charge more per orange to make it worth my time. Alternatively, I could buy a ladder. This would allow me to pick more oranges than if I climbed the tree, but less than when I was picking from ground level. I am now picking a moderate amount of oranges, through the use of a ladder. However, I have to pay for the ladder, so that cost is incorporated into the price of any oranges picked using the ladder.
It is important to note that we are only talking right now about supply. We are saying that if we had an infinitely large market for oranges with lots of voracious, orange-eating consumers, what price would be required to encourage someone to supply one more orange? And what price for the one after that?
Economics teaches us that the supply of extra goods must be paid at a price at least the same as or more than the last supply. Where the price for an extra orange is the same as the one before, the line is not upwards sloping, but flat. This is rarely the case in real life and so we simplify the "rule" and say that supply is upwards sloping.
Another "extreme" example of supply is where the supply of oranges is fixed; that is, there is a fixed amount of oranges in a market. The supply curve for a fixed supply of oranges would be a vertical line. Once again, this is rare in real life, but it is useful for determining the effect of policy on certain markets.
The next post will discuss demand.
- A market in this sense is not just one location, it is all the places and ways that a good may be purchased.
- The graph represents supply and demand over a given time period. However, the time period will often not be stated and for most analysis will not be required.
- Supply and demand graphs will often be presented without numbers on the quantity and price axes. In public policy, we are more often concerned with the expected shape, direction of the supply and demand curves (either of these can be a straight line, but we still refer to them as a curve), and movement of the curves over time. However, it is always true that the numbers increase from bottom to top for price and left to right for quantity.
Supply
As stated above, the red line represents supply of a specific good in a market. The line can be straight or curved, but most importantly, it slopes upwards. This means that the supply of a good into a particular market is more costly as more is supplied. (Note: the graph refers to a given time period, so improvements in productivity are not reflected in the graph, but rather in the change of the position and slope of the supply curve across two time periods and therefore two graphs.)
Think about the supply of oranges. I can supply all the oranges that grow on trees within arms reach relatively cheaply. I move from tree to tree collecting this low hanging fruit. However, once this fruit has been picked, to supply any more oranges will require me to work harder.
I could climb the tree and collect oranges, but I will be picking a lot less in any time period than when I was picking them from ground level. This means I have to charge more per orange to make it worth my time. Alternatively, I could buy a ladder. This would allow me to pick more oranges than if I climbed the tree, but less than when I was picking from ground level. I am now picking a moderate amount of oranges, through the use of a ladder. However, I have to pay for the ladder, so that cost is incorporated into the price of any oranges picked using the ladder.
It is important to note that we are only talking right now about supply. We are saying that if we had an infinitely large market for oranges with lots of voracious, orange-eating consumers, what price would be required to encourage someone to supply one more orange? And what price for the one after that?
Economics teaches us that the supply of extra goods must be paid at a price at least the same as or more than the last supply. Where the price for an extra orange is the same as the one before, the line is not upwards sloping, but flat. This is rarely the case in real life and so we simplify the "rule" and say that supply is upwards sloping.
Another "extreme" example of supply is where the supply of oranges is fixed; that is, there is a fixed amount of oranges in a market. The supply curve for a fixed supply of oranges would be a vertical line. Once again, this is rare in real life, but it is useful for determining the effect of policy on certain markets.
The next post will discuss demand.
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