Supply Curve (Economics) - Explained
What is the Supply Curve?
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What is the Supply Curve?
The supply curve refers to a graph showcasing the relationship between the cost of a product or service, and its supply for a specific period of time. When allocating points in a graph, the vertical axis represents the price, while the horizontal axis represents the quantity supplied.
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How does the Supply Curve Work?
The supply curve moves in an upward direction from left to right. This is also referred to as the law of supply. With the increase in the price of a product, its supply also increases, provided all other things remain constant. Here, the price remains to be independent, while the quantity stays dependent. Usually, the independent attribute is positioned on the horizontal axis, which tends to exceptional in this case.
Example of Supply Curve
With an increase in the price of soybeans, farmers will find it more profitable to grow more soybeans than any other crop. Ultimately, this will increase the total quantum of soybeans in the market. The extent to which the increase in price results in increase in quantity is known as supply elasticity, or price elasticity of supply. In case, the increase in the price of soybeans by 50% results in increase in their produce by 50% as well, the supply elasticity of soybeans will be unity or one. In case, the 50% increase in the price of soybeans raises their quantity supplied by 10%, the supply elasticity will be 0.2. Goods that have more elasticity in terms of supply are closer to horizontal axis, or have a shallow slope, while the ones having less elastic supply remain closer to vertical axis.
Factors Affecting the Supply Curve
There can be chances of drawing a new supply curve, in case, there is a change in variable besides price or quantity. For instance, if some soybean farmers who have just entered the market, start cutting forests, and cultivating lands for growing more soybeans. This will increase the production of soybeans, irrespective of the price remaining constant. This will ultimately increase the supply, and lead to the supply curve shifting to the right. There are many other variables such as the production price that can shift the supply curve from its initial position. The supply curve will encounter a left shift when the water prices increase due to lack of rain. In case, the price of the substitute good, say corn, increase, the farmers will be more tempted to produce it, which will negatively affect the production of soybeans, and result in the left shift. In case, there is a new innovation devised that ultimately enhances soybean produce, the supply curve will experience a right shift. In case, the prospective price of soybean are likely to be more than the existing price, the supply curve will face a left shift. This will enable the producers or farmers to wait, and decrease its current supply. Quantity or quantity supplied exhibits the quantum of products or services, say number of hotel rooms available, labor hours, tons of soybeans, etc. In a laymans language, it can be referred to as supply, however, in economic terms, supply is something that shows the correlation between the quantity supplied and its unit price. Other variables such as changes in technology, increased production levels, can also result in the right shifting of the supply curve. Besides, market expectations as well as the extent of competition can also result in changes in the supply curve.
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- Cost-Benefit Analysis
- Enlightened Self-Interest
- Fisher's Separation Theorem
- Ratchet Effect
- Total Utility (Economics)
- Efficiency Principle
- Expected Utility
- Subjective Theory of Value
- Positional Goods
- Indifference Curve
- Time Preference Theory of Interest
- Marginal Benefit
- Diminishing Marginal Utility
- Sunk Costs
- Production Possibilities Frontier
- Law of Diminishing Returns
- Economic Efficiency
- Efficiency Theory
- Productive Efficiency
- Capacity Utilization Rate
- Allocative Efficiency
- Pareto Efficient
- Comparative Advantage
- Criticisms of the Economic Approach
- Behavioral Economics
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- Positive Economics
- Invisible Hand
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