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M04.L01 — The Supply Curve: Law of Supply and Firm Supply

Module: Module 04 — Supply and Market Equilibrium Lesson: L01 of 06 Duration: ~30 minutes Level: Introductory Provenance: OpenStax Principles of Microeconomics 3e | Principles of Microeconomics (Curtis and Irvine)

Learning Objective

Explain how the law of supply determines the upward-sloping supply curve

Understanding Supply

In microeconomics, supply refers to the quantity of a good or service that producers are willing and able to sell at various prices during a given time period. The law of supply states that, all else being equal, as the price of a good rises, the quantity supplied will increase. This relationship is typically represented by an upward-sloping supply curve.

In Australia, we can observe this with local wine producers. When export prices for Australian Shiraz increase, vineyards allocate more resources to Shiraz production, increasing quantity supplied.

Worked Example

Australian Iron Ore Supply

  1. Current price: AUD 120/tonne → 500,000 tonnes supplied monthly
  2. Price rises to AUD 150/tonne → 650,000 tonnes supplied monthly
  3. Price falls to AUD 90/tonne → 400,000 tonnes supplied monthly

This demonstrates movement along the supply curve in response to price changes.

Common Misconception

"The supply curve shows how much producers want to sell"

The supply curve shows how much producers are willing and able to sell at various prices, given their production costs and capacity. Desire alone doesn't determine supply.

Key Takeaways

  • The law of supply shows a direct relationship between price and quantity supplied
  • Market supply aggregates all individual firms' supply curves
  • Movement along the curve reflects price changes, not shifts in supply
  • Profit motive drives firms to increase supply at higher prices

Practice

  1. If the price of wool increases by 15%, what would we expect to happen to quantity supplied?
  2. How does a firm's supply curve differ from the market supply curve?
  3. Why does the supply curve slope upward?

Further Resources

Provenance: OpenStax Principles of Microeconomics 3e | Principles of Microeconomics (Curtis and Irvine)