Section Navigation pg-10

We know that we should expect the supply relationship to be positive: higher prices lead to greater desired quantities supplied. It just seems to make sense, but that isn't really an explanation. We can explain this relationship with opportunity costs. Whether we're talking about a small one-person business, a huge multi-national corporation, or an industry made up of thousands of firms, the logic is the same. An increase in the quantity supplied requires that resources be taken away from other uses and devoted to increased production. As is always the case, those resources most useful to the job at hand, and least costly, will be used first. The time that is easiest to give up will be given up first. As more resources and time are required, they become more costly and the alterative uses given up become more valuable, so a higher price is required to meet these higher opportunity costs and induce the suppliers to increase production.

An individual may start a small business, perhaps making crafts or baking desserts, as a hobby or a part-time sideline. Initially, perhaps only a few spare hours each weekend will be devoted to the enterprise. If there is an increase in the price for which the output can be sold, our budding entrepreneur might be willing to devote all her weekends to production and sales. At even higher prices she might buy better equipment and devote even more time, working on the enterprise every night after work. As prices rise even more, her desired quantity supplied continues to rise. As long as she can keep selling all her output, high enough prices may lead her to quit her job so she can devote all her time to this enterprise, hire others, build a production facility and so on.7

If supply curves are upward sloping, meaning higher prices are associated with greater output, why is it that large companies usually sell their products at lower prices than small businesses who sell the same items? The complete answer to that is contained in Chapter 5. Costs. The short answer is that a large business with huge numbers of sales can afford to build large, efficient production facilities giving it lower unit costs, and can afford to buy materials in large quantities enabling them to negotiate lower prices from suppliers. Large or small, suppliers will tend to increase production if prices are rising, and cut production if prices are falling.

back forward

Implicit in our logic is the idea that as long as she charges the market price she can sell all her output.

Copyright © 1995-2005, Inc. - All Rights Reserved