Supply?

So, what is supply?

Let’s start at a very high level. With demand, we are thinking about consumers. We are thinking about people who want (demand) goods and services in the market. 

But consumers can’t make all these fancy goods and services themselves. They need a little help.

Supply is all about production. Supply is about firms (businesses, producers, it’s all the same here) producing the goods and services for consumers to, well, consume. 

“In a market, consumers demand goods and services, and firms supply the goods and services.”

But!

Because we’re doing economics, there’s always a but. In some markets, the roles are reversed. For example, in a labour market, individuals supply labour and firms demand this labour. So when we say consumers demand goods and services, and firms supply these goods and services, we are talking about a product market.

The Law of Supply

At different prices, firms will act in different ways. You might recall that at different prices, consumers will act in different ways. Generally, the higher the price, the lower the quantity that consumers demand.

Supply is the quantity of goods and/or services that firms in a particular industry are willing and able to sell at different price levels. For firms, there is a DIRECT relationship between price and quantity supplied.

What do I mean here? As price goes up, firms will wish to supply more to the market. 

Why? For two reasons. First, as price rises, firms realise that they can make more revenue if they sell more products (revenue = price * quantity sold). Second, as price goes up, more firms get the signal that they should produce more because they too could make more revenue as the price rises. 

The bottom line: as price rises, quantity supplied in a market will also rise. There is a direct relationship between the two variables.

Supply schedule and supply curve

The supply schedule sets out the level of quantity supplied at different price levels. It’s typically shown in a table, like the one below.

Hi, I’m a supply schedule.

We can then use the supply schedule to construct a supply curve. The supply curve is upward sloping because as price rises, so will quantity supplied. You can see this in the curve below: as the price rises from $1 per unit to $6 per unit, the quantity supplied will rise from 20 to 120 units.

A messy supply curve. Please, be neater.

The video below goes into more detail about the economic concept of supply.

Demand. The basics

Demand is a pretty fundamental part of Economics. Put simply, demand is how much stuff people want at different price levels.

More formally: demand is the level of goods and services consumers are willing and able to purchase at different price levels.

Think about your demand for something. Generally, the higher the price, the less of a good or service you would be prepared to buy. And we can take this idea into an economic concept known as the law of demand. 

“The law of demand states that the higher the price of a good or service, the less consumers will demand of it.”

Indeed, there is an inverse relationship between price and quantity demanded. The relationship is inverse in that as one goes up, the other goes down. As price rises, quantity demanded will fall — and vice versa.

Let’s go through a hypothetical example of this using the price and quantity demanded for waterbottles in an economy.

At a price of $2, waterbottles are relatively cheap so people are keen to snap them up. For an individual, at a price of $2, they will demand 20 waterbottles. They’ll buy some for now and some for later — it’s such a great deal!

But if the price rises, consumers will be less likely to buy waterbottles. In fact, they will no longer buy 20 waterbottles. If price rises to $10, they may only be willing and able to buy four waterbottles as it’s more expensive. 

We could create a table like the one on the right. All the numbers are made up — it’s a hypothetical example after all.

This table neatly displays the law of demand. As price rises, quantity demand (often abbreviated to QD) will fall. And from this table, known as a demand schedule, we can construct the actual demand curve. Check it out below.

If you’re keen on more, there’s a video on this too (see below).