Microeconomics Essentials: Building Supply Curves and Understanding Seller Costs

From a Supply Schedule to a Supply Curve

A supply schedule is a simple table showing how many units a seller is willing and able to produce and sell at different prices, holding other factors constant (technology, input prices, taxes, expectations, and so on). A supply curve is the graph of that same relationship: price on the vertical axis and quantity supplied on the horizontal axis.

Step-by-step: construct a supply curve from a schedule

1. Write a supply schedule. Example for one firm (a small bakery selling loaves per day):

   Price per loaf	Quantity supplied (loaves/day)
   $2	10
   $3	20
   $4	30
   $5	35
   $6	38

2. Set up axes. Put quantity on the horizontal axis and price on the vertical axis.

3. Plot each (Q, P) point. For example, plot (10, $2), (20, $3), (30, $4), (35, $5), (38, $6).

4. Connect the points. You can draw a smooth line or a step-like line depending on how discrete production is. The result is the firm’s supply curve for that period.

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Reading the curve: at a given price, the curve tells you the quantity the seller would choose to supply, assuming nothing else changes.

Why Supply Typically Slopes Upward

Most supply curves slope upward because producing additional units usually becomes more costly at the margin, and because sellers face capacity limits. The key idea is not “sellers like high prices” (they do), but “higher prices make it worthwhile to produce units that are more expensive to produce.”

Key terms in everyday language

• Marginal cost (MC): the extra cost of making one more unit. If you already made 30 loaves, marginal cost is the added cost of making the 31st (extra flour, extra labor minutes, extra oven time, extra wear-and-tear).

• Opportunity cost: what you give up by using resources one way instead of another. If the baker uses an hour to bake more loaves, that hour can’t be used to decorate cakes, rest, or take a catering order. Even if no cash changes hands, the “next best alternative” is a real cost.

Cost intuition: increasing marginal cost

As output rises, a firm often has to use less efficient methods: overtime pay, rushing, using older equipment, hiring less experienced workers, or crowding a fixed workspace. That tends to push marginal cost upward.

Think of a food truck:

• First 20 meals: uses prepped ingredients and normal pace (low marginal cost).
• Next 20 meals: starts running low on prepped items, needs extra prep time, maybe wastes more (higher marginal cost).
• Next 10 meals: must buy emergency supplies at a higher price or pay someone extra to help (even higher marginal cost).

A seller will generally supply additional units only if the market price is at least as high as the marginal cost of those units. When price rises, more units have marginal cost low enough to be worth producing, so quantity supplied rises.

Capacity limits and short-run constraints

Even if a firm wants to produce more, it may be constrained by:

• Physical capacity: limited oven space, limited machines, limited seating.

• Time capacity: a day has only so many labor hours.

• Input bottlenecks: a key ingredient or component is scarce.

These constraints often make the supply curve get steeper at higher quantities: each extra unit is harder to produce than the previous one.

Individual Firm Supply vs. Market Supply

Individual firm supply describes one seller’s quantity supplied at each price. Market supply adds up quantities supplied by all sellers in the market at each price.

How market supply is built: horizontal addition

To build market supply, you add quantities across firms at the same price. This is called horizontal summation because you add along the quantity axis.

Example: three sellers form the market supply schedule

Suppose three coffee stands supply cups per hour as follows:

At $4, the market supplies 25 + 14 + 10 = 49 cups per hour. Plot the market totals against price to get the market supply curve.

What changes market supply besides price?

When you are building a supply curve, you hold other factors constant. But in real life, market supply can change if:

• the number of sellers changes (new firms enter, some exit),

• input costs change (wages, rent, materials),

• technology changes,

• regulations/taxes/subsidies change,

• expectations about future prices change.

Those factors shift supply; a price change causes movement along supply. The next section trains you to tell the difference.

Interpreting Supply: Movement Along vs. Change in Quantity Supplied

Quantity supplied is a specific number at a specific price on a given supply curve. A change in quantity supplied happens when price changes and you move to a different point on the same curve.

In contrast, a change in supply means the entire relationship changes (the whole curve shifts) because something other than the good’s own price changed. This chapter focuses on reading movements along supply when price changes.

Interpretation drill 1: identify the direction of movement

Use this rule: Price up → quantity supplied up (move up/right along the curve). Price down → quantity supplied down (move down/left along the curve).

Practice prompts:

• The price of a smoothie rises from $5 to $6. What happens? Movement along supply to a higher quantity supplied.

• The price of a handmade bracelet falls from $20 to $15. What happens? Movement along supply to a lower quantity supplied.

Interpretation drill 2: compute the change in quantity supplied from a schedule

Given the bakery schedule below, answer the questions by reading quantities at each price.

• If price rises from $3 to $5: quantity supplied changes from 20 to 35, so ΔQs = 35 − 20 = +15 loaves/day. This is a movement along the supply curve.

• If price falls from $5 to $4: quantity supplied changes from 35 to 30, so ΔQs = 30 − 35 = −5 loaves/day. This is a movement along the supply curve.

Interpretation drill 3: “movement along supply” language practice

Rewrite each statement using correct supply language.

• Statement: “When the price increased, supply increased.” Better: “When the price increased, quantity supplied increased (movement along the supply curve).”

• Statement: “When the price decreased, supply decreased.” Better: “When the price decreased, quantity supplied decreased (movement along the supply curve).”

Connecting Costs to the Supply Schedule You Observe

A supply schedule is not random; it reflects the seller’s costs and constraints. One practical way to interpret an upward-sloping schedule is: the early units are relatively cheap to produce, but later units require higher-cost actions.

Example: what might be happening behind the numbers?

Suppose a landscaping service supplies lawn-mowing jobs per week:

At higher prices, the business is willing to take on jobs that are less convenient (higher opportunity cost) or require extra labor (higher marginal cost). That is the everyday logic behind the upward slope.

Quick Checks (Self-Quiz)

• Define marginal cost in one sentence, without math.

• Give one example of opportunity cost for a small seller.

• If price rises and nothing else changes, is it a shift of supply or a change in quantity supplied?

• Two firms supply 8 and 12 units at a price of $10. What is market quantity supplied at $10?