The diagram above shows three supply curves for apples. a movement from point a to point b

The supply curve is a graphic representation of the correlation between the cost of a good or service and the quantity supplied for a given period. In a typical illustration, the price will appear on the left vertical axis, while the quantity supplied will appear on the horizontal axis.

• On most supply curves, as the price of a good increases, the quantity of goods supplied also increases.
• Supply curves can often show if a commodity will experience a price increase or decrease based on demand, and vice versa.
• The supply curve is shallower (closer to horizontal) for products with more elastic supply and steeper (closer to vertical) for products with less elastic supply.
• The supply curve, along with the demand curve, are the key components of the law of supply and demand.

The supply curve will move upward from left to right, which expresses the law of supply: As the price of a given commodity increases, the quantity supplied increases (all else being equal).

Note that this formulation implies that price is the independent variable, and quantity the dependent variable. In most disciplines, the independent variable appears on the horizontal or x-axis, but economics is an exception to this rule.

If a factor besides price or quantity changes, a new supply curve needs to be drawn. For example, say that some new soybean farmers enter the market, clearing forests and increasing the amount of land devoted to soybean cultivation. In this scenario, more soybeans will be produced even if the price remains the same, meaning that the supply curve itself shifts to the right (S2) in the graph below. In other words, supply will increase.

Technology is a leading cause of supply curve shifts.

Other factors can shift the supply curve as well, such as a change in the price of production. If a drought causes water prices to spike, the curve will shift to the left (S3). If the price of a substitute—from the supplier's perspective—such as corn increases, farmers will shift to growing that instead, and the supply of soybeans will decrease (S3).

If a new technology, such as a pest-resistant seed, increases yields, the supply curve will shift right (S2). If the future price of soybeans is higher than the current price, the supply will temporarily shift to the left (S3), since producers have an incentive to wait to sell.

Should the price of soybeans rise, farmers will have an incentive to plant less corn and more soybeans, and the total quantity of soybeans on the market will increase. 

The degree to which rising prices translate into rising quantity is called supply elasticity or price elasticity of supply. If a 50% rise in soybean prices causes the number of soybeans produced to rise by 50%, the supply elasticity of soybeans is 1.

On the other hand, if a 50% rise in soybean prices only increases the quantity supplied by 10 percent, the supply elasticity is 0.2. The supply curve is shallower (closer to horizontal) for products with more elastic supply and steeper (closer to vertical) for products with less elastic supply.

The terminology surrounding supply can be confusing. "Quantity" or "quantity supplied" refers to the amount of the good or service, such as tons of soybeans, bushels of tomatoes, available hotel rooms, or hours of labor. In everyday usage, this might be called the "supply," but in economic theory, "supply" refers to the curve shown above, denoting the relationship between quantity supplied and price per unit.

Other factors can also cause changes in the supply curve, such as technology. Any advances that increase production and make it more efficient can cause a shift to the right in the supply curve. Similarly, market expectations and the number of sellers (or competition) can affect the curve as well.

The law of supply and demand is an economics concept whereby the price of a good will reach an equilibrium based on the amount of that good available (the supply) and the amount that customers want (the demand).

Image by Julie Bang © Investopedia 2020 

The demand curve is the complement to the supply curve, in the law of supply and demand. Unlike the supply curve, the demand curve is downward-sloping, since the higher the price of a good, the less demand there will be for it, all else equal.

The supply curve can shift based on several factors including changes in production costs (e.g., raw materials and labor costs), technological progress, the level of competition and number of sellers/producers, and the regulatory & tax environment.

Demand is influenced by the amount of disposable income available to consumers along with consumer preferences. The presence of viable substitutes or alternatives can also shift the demand curve.

1. If consumers expect the price of some good to rise next week, then we generally observe the price of the good rising this week. Explain this fact using a graph.

If the good is storable, and an increase in price is expected, consumers will want to buy the good today, before the price increases. As a result, the current demand for the good increases, which results in an increase in the price of the good today. See graph.

2. The drought in the plain states has made grain, and therefore feed, quite expensive. Many ranchers cannot afford to feed their cattle, and have sold much of their herd for slaughter.
a. What will be the immediate effect of this event on the equilibrium price and quantity of beef? Illustrate using a supply and demand diagram.

Slaughtering the cows will result in an increase in the supply of beef to the market, which will in turn lead to a decrease in the equilibrium price of beef and an increase in the equilibrium quantity of beef. See graph.

b. Chicken and beef are substitute goods. Illustrate the effect that the slaughter of the cattle herds will have on the equilibrium price and quantity of chicken.

As the price of beef decreases, consumers will buy more beef and less chicken. The demand for chicken will decrease, causing a decrease in the equilibrium price and quantity of chicken. See graph.

As consumers' income decreases, the demand for normal goods (such as steak) decreases while the demand for inferior goods (such as hamburgers) increases. Keep in mind that our conclusion from part a is still valid. A lower price of beef will increase the supply of all goods in which beef is an input. Therefore in each of the two markets in question we deal with simultaneous shifts in supply and demand.

Steak: S increases, D decreases.		Hamburgers: S increases, D increases.
The price of steak will decrease. We cannot say for sure what will happen to quantity, since that will depend on the relative magnitude of the two shifts.		The equilibrium quantity of hamburgers sold will increase. We cannot say for sure what will happen to the equilibrium price of a hamburger, since that will depend on the relative magnitude of the two shifts.

3. Assume that the markets for sugar cane, rum, and whiskey are initially in equilibrium. Assume further that Hurricane Marilyn destroys much of the Jamaican sugar cane crop. Sugar cane is a principal ingredient in rum, but it is not an ingredient in whiskey. Analyze the effect of the hurricane on the markets for each of the three goods. Explain using graphs.

Step One - The market for sugar cane The Hurricane results in a decrease in supply (at any given price, sellers are no longer able to provide as much cane as they used to). As a result, the equilibrium price of sugar cane will increase, and the equilibrium quantity will decrease. See graph.

Step Two - The market for rum
Sugar cane is a principal ingredient in rum, and it is now more expensive. An increase in the price of inputs causes a decrease in supply. As a result, the equilibrium price of rum will increase, and the equilibrium quantity will decrease. The graph will be similar to the one above.

Step Three - The market for whiskey
It is reasonable to assume whiskey and rum are substitutes. Rum is now more expensive than it used to be (see Step Two). As a result, more consumers will buy whiskey instead. This will cause an increase in the demand for whiskey, which leads to higher equilibrium price and quantity of whiskey. See graph.