Supply: Law of Supply, Marginal Cost, Supply Shifters

Why would a jump in the price of strawberries make a farm grow fewer blueberries? Nothing about blueberries changed. Hold that thought. This is Module 2.2, Supply.

A supply schedule is a table of how much sellers are willing and able to sell at each price. Graph it, and you get the supply curve. Same axes as demand: price on the vertical, quantity on the horizontal. This curve slopes up. Label both axes and the curve S. Quantity supplied is the amount sellers offer at one price. The law of supply: when a good's own price rises, its quantity supplied rises too, and the reverse, other things equal. Sellers respond to incentives too, and face constraints like costs. A higher price rewards making more.

Why does making more take a higher price? Because each extra unit usually costs more to make than the one before. Say Priya bakes cookies to sell. Her first dozen each week costs her $3 in ingredients and time, the second $5, and the third $8, as her nights get busier. The extra cost of one more unit is its marginal cost. Priya bakes another dozen only if the price beats that cost. At $4 a dozen, she bakes 1. At $6, she bakes 2. At $9, she bakes all 3.

Higher price, more cookies. Rising marginal cost is the main reason supply slopes up.

So what just happened? One: each extra dozen cost Priya more: $3, $5, $8. Two: she baked a dozen only when the price beat its cost. Three: at $4, $6 and $9 she baked 1, 2 and 3 dozen, so her supply curve slopes up.

Only extra costs matter. A yearly stand fee is the same however much she bakes, so it doesn't change how many she bakes at each price.

A change in the good's own price slides you along the supply curve. That's a change in quantity supplied. When a supply shifter changes, like input prices or technology, the whole curve shifts: a change in supply. Buyer-side changes, like income or tastes, shift demand instead. Exam trap number one: an increase in supply shifts the curve right, not up. Label the new curve S2 and draw an arrow pointing right. Because supply slopes up, a shift right also looks like a shift down. So a supply curve that looks like it moved up has really shifted left: a decrease.

Rule of thumb: right means more for sale at every price, and left means less.

So what just happened? One: an increase in supply moved the curve right, from S1 to S2. Two: because supply slopes up, S2 also sits lower. Three: so a curve that looks higher has shifted left: less for sale at every price, a decrease.

So what shifts supply? A handy memory trick is I-RENT: input prices, related goods, expectations, number of producers, and technology. Input prices. Inputs are what you use to make the good. If flour gets more expensive, every dozen costs more to make, so cookie supply shifts left. Exam trap number two: check whose price rose. A higher price for the product itself raises quantity supplied, a slide. A higher price for an input cuts supply, a shift left. In the flour market itself, bakers are the buyers. So if cookies get popular, flour demand shifts right, not flour supply.

So what just happened? One: pricier flour made every dozen cost more, so cookie supply shifted left. Two: a higher cookie price is a slide: quantity supplied rises. Three: in the flour market, bakers are buyers, so popular cookies shift flour demand right, not supply.

Quick refresher from Module 2.1: substitutes are goods buyers swap between, like boba and iced coffee. Pricier iced coffee sent buyers to boba, so boba demand shifted right. Now meet the seller version.

Related goods, and here's our farm. The same field can grow strawberries or blueberries, so they're substitutes in production. When strawberry prices jump, the farm plants more strawberries on that field, so the supply of blueberries shifts left. Puzzle solved.

So what just happened on the farm? One: strawberry prices jumped. Two: that field now earns more growing strawberries, so the farm plants more of them. Three: the farm offers fewer blueberries at every price: blueberry supply shifted left, though the change started with strawberries.

Careful: with buyers, a pricier substitute raises demand for the other good. With sellers, it cuts supply of the other good. Complements in production are made together, like beef and leather from the same cattle. Pricier beef means more cattle raised, so leather supply shifts right. Expectations: if sellers expect a higher price next month, they hold some goods back, so today's supply shifts left. Buyers do the opposite and buy now. Number of producers: when new sellers enter, like food trucks at a fair, supply shifts right. When sellers exit, it shifts left.

Technology: a faster oven cuts the cost of each dozen, so supply shifts right.

Last idea: market supply, the total of every seller's supply. Like demand, you add quantities sideways at each price. Worked example. Priya sells 1 dozen at $4, 2 at $6, and 3 at $9. Her neighbor Omar has higher costs, so he sells 0 at $4, 1 at $6, and 2 at $9. The rule: at each price, add up every seller's quantity. At $6, that's 2 plus 1, so sellers offer 3 dozen per week. At $4 it's 1 dozen, and at $9 it's 5 dozen. Plot those points and you get the market supply curve, which slopes up.

So what just happened? One: we took one price at a time. Two: at $6, Priya offered 2 dozen and Omar 1, so the market offered 3 dozen. Three: the totals, 1, 3 and 5 dozen, trace a market supply curve that slopes up.

Quick refresher before the quiz. If the good's own price changes, slide along its supply curve: quantity supplied changes. If an I-RENT shifter changes, the whole curve shifts: supply changes. Cookie price up: a slide. Pricier flour: a shift left.

Quick check. Farmers can grow corn or soybeans on the same land. Corn prices rise. What happens to soybean supply?

A) It increases, shifting right. B) It decreases, shifting left. C) Quantity supplied rises, a movement along the curve. D) Nothing, since the soybean price didn't change.

The answer is B. Corn now pays more, so farmers move land into corn and offer fewer soybeans at every price. The tempting wrong answer is A. For buyers, a pricier substitute shifts demand right. For sellers, pricier corn pulls land away, so soybean supply shifts left.

Question two. Which of these shifts the supply curve for bicycles to the right?

A) A higher bike price. B) A higher price for frame steel. C) A faster way to build frames. D) Higher buyer incomes.

The answer is C. Better technology lowers the cost of each bike, so more are offered at every price. The tempting wrong answer is A. A higher bike price raises quantity supplied, a slide along the curve, not a shift. And D shifts demand, not supply.

Recap. A good's own price slides you along its supply curve, in the same direction. The I-RENT shifters move the whole curve, and right means an increase. Tip: sketch the graph, even when a question doesn't ask for one. Next: Module 2.3, Price Elasticity of Demand.