Supply in economics

Movements versus shifts

Movements along the curve occur only if there is a change in quantity supplied caused by a change in the good's own price.^[10] A shift in the supply curve, referred to as a change in supply, occurs only if a non-price determinant of supply changes.^[10] For example, if the price of an ingredient used to produce the good, a related good, were to increase, the supply curve would shift left.^[11][12]

Inverse supply equation

By convention in the context of supply and demand graphs, economists graph the dependent variable (quantity) on the horizontal axis and the independent variable (price) on the vertical axis. The inverse supply equation is the equation written with the vertical-axis variable isolated on the left side: P = f ( Q ) {\displaystyle P=f(Q)} . As an example, if the supply equation is Q = 40 P − 2 P r g {\displaystyle Q=40P-2P_{rg}} then the inverse supply equation would be P = Q 40 + P r g 20 {\displaystyle P={\tfrac {Q}{40}}+{\tfrac {P_{rg}}{20}}} .^[13]

Marginal costs and short-run supply curve

A firm's short-run supply curve is the marginal cost curve above the shutdown point—the short-run marginal cost curve (SRMC) above the minimum average variable cost. The portion of the SRMC below the shutdown point is not part of the supply curve because the firm is not producing any output.^[14] The firm's long-run supply curve is that portion of the long-run marginal cost curve above the minimum of the long run average cost curve.

Shape of the short-run supply curve

The Law of Diminishing Marginal Returns (LDMR) shapes the SRMC curve. The LDMR states that as production increases eventually a point (the point of diminishing marginal returns) will be reached after which additional units of output resulting from fixed increments of the labor input will be successively smaller. That is, beyond the point of diminishing marginal returns the marginal product of labor will continually decrease and hence a continually higher selling price would be necessary to induce the firm to produce more and more output.