ECONOMIC SUPPLY & DEMAND

Price8 D-43883.3 SupplyWillingness and ability to supply goods determine the seller’s actions. At higherprices, more of the commodity will be available to the buyers. This is because thesuppliers will be able to maintain a profit despite the higher costs of production that mayresult from short-term expansion of their capacity 5 .In a real market, when the inventory is less than the desired inventory,manufacturers will raise both the supply of their product and its price. The short-termincrease in supply causes manufacturing costs to rise, leading to a further increase inprice. The price change in turn increases the desired rate of production. A similar effectoccurs if inventory is too high. Classical economic theory has approximated thiscomplicated process through the supply curve. The supply curve shown in Figure 2slopes upward because each additional unit is assumed to be more difficult or expensiveto make than the previous one, and therefore requires a higher price to justify itsproduction.SupplyFigure 2: Supply CurveAt high prices, there is more incentive to increase production of a good. This graphrepresents the short-term approximation of classical economic theory.5 Short-term expansion can be achieved by giving workers overtime hours, contracting to an outside source,or increasing the load on current equipment. These types of changes increase per-unit supply costs.