Supply Curve

A supply curve is a graphical representation of the relationship between the price of a good or service and its supply. There are two variables involved — price on the Y-axis and supply on the X-axis. When the supply curve is sloping from the bottom left to the upper right, supply will increase as price increases. The supply curve can help to show what will happen to the price of a product or service as the level of its supply changes and vice versa. Be aware that price is considered the independent variable. In statistics, the independent variable is on the x-axis instead of the y-axis, but not in economics.

When factors outside of price or supply come into play, a new supply curve must be drawn. This means the supply curve will shift left or right. Some factors that will shift the supply curve include more competition entering into the market or the introduction of more efficient technology for producing goods or services. Both will increase the supply for those goods or services.

For example, if more car repair shops open in the same city, rates will become competitive and it will be difficult for anyone car repair shop to maintain higher rates, much less increase them. This can also happen for soybean farmers. When more farmers enter the market, or new technology is introduced that allows farmers to harvest more soybeans, the supply of soybeans will increase. In both cases, supply increases. This increase in supply shifts the supply curve to the right.

The correlation between the price and supply movement along the curve is called supply elasticity or price elasticity of supply. A one-to-one movement has a supply elasticity of 1. Meaning that if price increases by one unit on the curve and supply does the same, there is a supply elasticity of 1. The supply curve, in that case, is straight (diagonally). If price rises by 5 units and the supply only rises by 1 unit, price elasticity is only 0.2. That curve is closer to horizontal and has higher elastic supply. Lower elastic supply means the curve is closer to vertical.

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