What happens to demand&supply curves(based on sale/purchase prices)if supply curves bear no relation to costs?

Answer 1

The demand curve would be unaffected, since costs to a producer have no bearing on market demand.

If the supply curve disregards costs, there must be a basis to it. Whether it is monopolistic price-setting, cartel hoarding, or what have you, there will be a supply curve that does not reflect available information.

Where demand and supply intersect you will still find your answer.

Answer 2

That is not the case. The supply side also depends on the supply and demand. The supply depends on the prices of inputs, although if you are to look from sale/purchase price relationship, those inputs are intermediary.

Answer 3

The quantity suppliers are willing to supply at various prices always bears relation to costs. There's more to the cost of oil, for example, than the exploration, extraction, transport, refining and selling. There's also a little something called opportunity cost.

Let's say that I am a supplier looking to sell a barrel of oil that cost me $30. I have two customers, the U.S. and China. The U.S. is willing to pay $45 for that barrel and China is willing to pay $50. I'll sell to China, of course.

To you, and most accountants, it looks like I made a tidy $20 profit. However, I gave up the next best price of $45. So, selling to China for $50 made me give up the opportunity of selling to the U.S. for $45. So, my opportunity cost is $45 and my economic profit is $5. In other words, I forgo $45 for the $50. Who woudn't?

Now, look at it from the other way. What if, out of national pride, I decided to sell to the U.S.? I gain $45, but forgo the opportunity of gaining $50. Ouch. Now my opportunity cost is $50 and my economic profit is -$5.

Of course, some would say that they'd be satisfied with either a $15 or $20 accounting profit. People often think that way because they don't understand the concept of opportunity cost and they never consider what they gave up by making a decision.

Let me give you one more example to drive home the concept for you. Let's say that you have a bicycle for sell. Yesterday you were asking $100 for it. It's a good bike, but it's been used and you looked around and that seemed to be the going price for bicycles of that caliber.

Overnight, gas prices skyrocket and people start buying bicycles like crazy in order to avoid high gas costs. All of sudden you realize that people are willing to pay $200 for bikes like your's.

Are you still going to ask $100 for it and leave $100 on the table? I bet not. Perhaps you would. After all your "costs" didn't change overnight. You bought the bike 3 years ago and it didn't cost you much to keep it for an extra day. But, one of your costs did change - your opportunity cost.

Yesterday you were willing to give up the bike for $100. Now you realize that if you sell it for $100, the person you sold it to can re-sell for $200 and make a quick $100 profit without much effort. My guess is that you'd want the extra $100 in your pocket, not his.

You might also decide that the you should keep the bike in order to save money on gas. The increased gas costs is another opportunity cost of giving up the bike.

I hope this helps.

Answer 4

Supply curve becomes vertical, or totally inelastic. Supply does not respond to price changes.