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What does the supply curve actually represent?

I have some problems while trying to understand the “Law of Supply”, the supply curve and its role in determining the market equilibrium. Here are the supply and demand curves:

Supply and demand curve

Now what does the supply curve (“S” above) actually represent? People say it represents the supply for any “given” price (and it’s not clear to me how can a price be “given” for a supplier) assuming “all else equal”… so are we assuming that the demand is fixed regardless of the price? But Why should a seller increase its supply just because the price increases even if there is no extra demand?

Can you eventually suggest a great textbook that explains this topic preventing all the doubts and misconceptions?

Thanks

Answer 875

First of all I suppose you're asking question about a short-run market supply curve.

Actually economists distinguish the short-run market supply curve from the long-run market supply curve. Two things are assumed constant by definition of the short run:

  1. The availability of one or more fixed inputs (typically physical capital)

  2. the number of firms in the industry Supply curve (as we only talk about supply here) represents:

Under the above conditions, we can accept two basic laws about the supply curve:

  1. If demand increases (demand curve changes to D2 from D1) and supply remains unchanged, then it leads to higher equilibrium price and quantity.

  2. If demand decreases (demand curve changes to D1 from D2) and supply remains unchanged, then it leads to lower equilibrium price and quantity.

The key point is that all these curves are under the assumption of perfect competition. But it doesn't mean they're not useful or real, as they are helping us to have a comprehensible model of a market.

About your second question: We're not talking about a single seller. We're talking about the market. Suppose that the demand reaches to a specific point (unchanged supply) which causes prices to rise. In this case the profit margin for producers (suppliers) increases and they will increase their supply to sell more and gain more profit. Now the supply is not fixed any more and more supply in the market causes the prices to come down. So it's not like nothing has happened and with no apparent reason suppliers increase their supply.

About the textbook, I recommend you the following book:

Principles of Microeconomics by N. Gregory Mankiw, Publisher: South-Western College

It's also good to visit here and here to choose the right book.

Answer 1267

The central assumption of the supply-and-demand model is that the people in our model behave as price takers. We are talking about a model, not the real world.** We use models in the hope that they are rich enough to say something about real markets, while still being simple enough to yield concrete answers.

In making the price-taking assumption, we pretend that...

The supply curve tells us how producers would respond (that is, how much they would supply) if the price were P. The demand curve tells us something similar about consumers.$

I think every textbook and economics teacher would say something along these lines, but I don't know any introductory books.

** As Manoochehr pointed out, the supply-and-demand model does not apply to every situation in the real world. In particular, it is a short-run model.

$ If you think about it, because each side of the market responds to price, it is impossible (in our model) for demand to be at two quantities for a particular price (and similarly for supply). However, in principle it is possible for two prices to lead to the same quantity response.

Answer 1289

Can you eventually suggest a great textbook that explains this topic preventing all the doubts and misconceptions?

That textbook is Man, Economy, and State by Murray Rothbard. It is free in both PDF and .epub formats. It derives the supply curve very slowly from first principles.

The first thing you need to realize is that that a supply curve is not a curve at all, it is a bunch of points. We only draw it as a line for convenience. Download the PDF and take a look at the three diagrams on pages 88, 120, and 121, and this will be clear. In order to understand supply curves, you need to understand value scales. Most textbooks skip this step, that is why it is a bit fuzzy.

Given a quantity X, suppose price P is the maximum the market will pay for each unit of the product such that the quantity X will be sold. Then the point (X, P) forms a point on the supply curve.

For example, lets say the market will pay at most \$10 per hat for 100 hats. Then (100, 10) will be a point on the supply curve. Suppose the market will pay at most \$7 per hat for 200 hats. Then the point (200, 7) will be on the supply curve as well.

This is a quote from page 121 of the book.

The tabulation of supply offered at any given price is known as the supply schedule, while its graphical presentation, with the points connected here for the sake of clarity, is known as the supply curve.

Answer 876

Here’s an old answer on another site:

http://quant.stackexchange.com/questions/624/supply-and-demand-of-oil/627#627

And, in case you’re interested in a related Demand Curve, see Figure 1 on page 28 of the following:

http://web.mit.edu/knittel/www/papers/JEP_latest.pdf

Here’s a reasonable textbook that introduces the main concepts:

http://www.daviddfriedman.com/Academic/Price_Theory/PThy_ToC.html

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