Why does supply increase as price increases?

Question

I can understand why demand decreases as price increases but I can't understand why the supply curve goes upwards. Can anyone explain it please?

Surely if you're selling at a lower price you need to sell more to recoup your costs? I can see that producing 201 units will cost more than producing 200 units but surely the cost per unit will be cheaper otherwise what's the point in mass production?

Thanks

Answer 1

As the price goes up, more people are likely to be interesting in making the product.

For example, if I sell lemonade for 50 cents a glass, I'll probably sell lots of lemonade, but I won't make much money, and nobody is going to try to compete with me.

If I sell lemonade for $5 a glass (assuming I'm actually successful at this), lots of people will see this as a lucrative business opportunity and will set up lemonade stands to compete with me. In fact, I might want to open more lemonade stands, myself.

Answer 2

Why does the supply curve slope upward? A good question.

Your intuition is on, and off. You need to recall exactly *what* a supply curve tells you. The way you're looking at it is that the supply curve is the price demanded by the firm for a certain quantity of goods. Alternatively, you it can be looked at as the quantity of goods a firm wants to supply at a given price.

Something that is being implied here, that really isn't said, is that these are *profit maximizing* behaviors. They quantity-price relationship you see in a supply curve come from profit maximizing behavior.

Given this, what is really driving the slope is increasing marginal costs due to decreasing marginal productivity. What happens is that, no, "cost per unit", ie: average total cost, does not decline forever. This has nothing to do with "mass production", but rather, it is a property of virtually *all* production processes.

For most firms, the average total cost curve will be somewhat 'u'-shaped. It will have a minimum, and then start to increase again. Why? Diminishing marginal productivity. As you add more inputs to the production process, each one increases productivity less and less. Thus, to maintain the same level of productivity, it may take more inputs. For example, say a factory employs 100 workers, and they make 100 units of output a day. But to make ten more units, they may have to hire 11 more workers. Do a web search on diminishing marginal productivity if you'd like better examples.

Something else to think about, is if the cost per unit were cheaper always, a firm could always produce more and more and more, so that, eventually, their cost of production for a unit would be zero! Then, beyond that point, they could produce more and more and more - essentially getting output for free. But then every firm would do that, and so the supply of every good would be as large as you'd like, ie: infinite. But that isn't the case, it it?

Answer 3

I am not sure that I really understand what you are asking - but from what I see, the cost will be lower per unit the more units that you buy - therefore you may buy more than you require and although it will cost you more overall, the unit cost will be lower.
I think that more probably you are talking of the price increasing to match the demand - that is so many people want the product that they are actually 'bidding' against each other to buy they product - and while it may be for the best price they can get, it will be at an inflated price because of the demand.
Another way of looking at it is that you have an item for sale. You are told that Item X is worth Ten Million Pounds - but no-one wants to buy it. What is the point of the valuation if you can't sell for the price that you want to? So you have to sell for Five Million Pounds (at a small profit) or at Four Million Pounds (at a loss).
Prices will always be governed by demand.

Answer 4

If you maintain the control or restriction on supply you can force the unit price up to those who want to buy (demand) will willingly pay more or have to go with out

when you are maiking more profit the unit cost of supply becomes less of a risk so you can afford to produce more and that will decrease the production and delivery or logistics cost further decreasing unit cost

That is my view of the subject ( not officlal)

Answer 5

Simply, as the demand decreases and manufacturing stays constant then the supply will increase because less items, goods and services are being sold due to the increase in price. If the supply increases too much the price is likely to go down and thus demand will be increased.

Answer 6

I think you have it wrong. As the demand for a product goes up so does the supply of them and the cost. The cost and the supply goes down as the demand for that product goes down.

A good example of this is a specific toy at Christmas time, all the kids want it. The price goes up for that toy, while other toys that are not as popular, go on sale.

Answer 7

I think you got your wires crossed; the lower the price the higher the demand and the lower the supply (less profit to be made).

The higher the price, the more the supply because there is more and more profit to be made. But this also lowers the dmand as things gets more and more expensive, so fewer and richer people can afford them.

Answer 8

Ferengi rule of aquasition number 5

first create a demand for a product and then increase the price, its called PROFIT magins

Answer 9

the reason supply goes up as price goes up is because they can make more money per item. therfore there will be more people willing to sell the item in question.
your second point has to do with marignal cost and marginal revenue which you will cover later.

Answer 10

furnish and demand are thoroughly diverse from volume presented and volume demanded. volume demanded is an certainly volume, as is QS too. even as prices develop, volume presented is higher, because call for continues to be consistent. the upward push in volume presented is a rightward shift on the graph.