What Is a Supply Curve?
The supply curve is a graphic representation of the correlation between the cost of a good or service and the quantity supplied for a given period. In a typical illustration, the price will appear on the left vertical axis, while the quantity supplied will appear on the horizontal axis.
- On most supply curves, as the price of a good increases, the quantity of supplies increases.
- Emerging technology that increases efficiency lowers the labor cost and therefore price of a good.
- Supply curves can often show if a commodity will experience a price increase or decrease based on demand, and vice versa.
How a Supply Curve Works
The supply curve will move upward from left to right, which expresses the law of supply: As the price of a given commodity increases, the quantity supplied increases (all else being equal).
Note that this formulation implies that price is the independent variable, and quantity the dependent variable. In most disciplines, the independent variable appears on the horizontal or x-axis, but economics is an exception to this rule.
If a factor besides price or quantity changes, a new supply curve needs to be drawn. For example, say that some new soybean farmers enter the market, clearing forests and increasing the amount of land devoted to soybean cultivation. In this scenario, more soybeans will be produced even if the price remains the same, meaning that the supply curve itself shifts to the right (S2) in the graph below. In other words, supply will increase.
Technology is a leading cause of supply curve shifts.
Other factors can shift the supply curve as well, such as a change in the price of production. If a drought causes water prices to spike, the curve will shift to the left (S3). If the price of a substitute—from the supplier's perspective—such as corn increases, farmers will shift to growing that instead, and the supply of soybeans will decrease (S3).
If a new technology, such as a pest-resistant seed, increases yields, the supply curve will shift right (S2). If the future price of soybeans is higher than the current price, the supply will temporarily shift to the left (S2), since producers have an incentive to wait to sell.
Example of a Supply Curve
If the price of soybeans rises, farmers will have an incentive to plant less corn and more soybeans, and the total quantity of soybeans on the market will increase.
The degree to which rising price translates into rising quantity is called supply elasticity or price elasticity of supply. If a 50% rise in soybean prices causes the number of soybeans produced to rise by 50%, the supply elasticity of soybeans is 1. If a 50% rise in soybean prices only increases the quantity supplied by 10 percent, the supply elasticity is 0.2. The supply curve is shallower (closer to horizontal) for products with more elastic supply and steeper (closer to vertical) for products with less elastic supply.
The terminology surrounding supply can be confusing. "Quantity" or "quantity supplied" refers to the amount of the good or service, such as tons of soybeans, bushels of tomatoes, available hotel rooms or hours of labor.
In everyday usage, this might be called the "supply," but in economic theory, "supply" refers to the curve shown above, denoting the relationship between quantity supplied and price per unit.
Other factors can also cause changes in the supply curve, such as technology. Any advances that increase production and make it more efficient can cause a shift to the right in the supply curve. Similarly, market expectations and the number of sellers (or competition) can affect the curve as well.