Introducing Supply and Demand
Market Supply
Market supply is the summation of the individual supply curves within a specific market where the market is characterized as being perfectly competitive.
LEARNING OBJECTIVES
Identify the market conditions that yield a market supply curve.
KEY TAKEAWAYS
Key Points
- A supply curve is the graphical representation of the supplier's positive correlation between the price and quantity of a good or service.
- The supply curve can only be attributed to a depiction of a perfectly competitive market due to the unique attributes of perfect competition: firms are price takers, no single firm's actions can influence the market price, and ease of exit and entry.
- The market supply curve is derived by summing the quantity for a given price across all market participants (suppliers). It depicts the price-to-quantity combinations available to consumers of the good or service.
Key Terms
- Supply curve: A graphical representation of the quantity producers are willing to make when the product can be sold at a given price.
A supply curve is the graphical representation of the supplier's positive correlation between the price and quantity of a good or service. As a result, the supply curve is upward sloping. Market supply is the summation of the individual supply curves within a specific market.
Market Supply: The market supply curve is an upward sloping curve depicting the positive relationship between price and quantity supplied.
The market supply curve is derived by summing the quantity suppliers are willing to produce when the product can be sold for a given price. As a result, it depicts the price to quantity combinations available to consumers of the good or service. In combination with market demand, the market supply curve is requisite for determining the market equilibrium price and quantity.
By its very nature, conceptualizing a supply curve requires the firm to be a perfect competitor, namely requires the firm to have no influence over the market price. This is true because each point on the supply curve is the answer to the question "If this firm is faced with this potential price, how much output will it be able to and willing to sell? " If a firm has market power, its decision of how much output to provide to the market influences the market price, then the firm is not "faced with" any price, and the question is meaningless.
The attributes of a competitive market signal that the price is set external to any firm. Therefore, production in the market is a sliding scale dependent on price. As price increases, quantity increases due to low barriers to entry, and as the price falls, quantity decreases as some firms may even opt out of the market.
The supply curve can be derived by compiling the price-to-quantity relationship of a seller. A seller could set the price of a good or service equal to zero and then incrementally increase the price; at each price he could calculate the hypothetical quantity he would be willing to supply. Following this process the seller would be able to trace out its complete individual supply function. The market supply curve is simply the sum of every seller's individual supply curve.