Re: Is the supply curve a fallacy?

Smiling Dave — Sun, 10 Oct 2010 20:24:54 GMT

Deep stuff.

1. The supply curve assumes one-to-one relationship between prices and quantity offered for sale.

At a given price, once all the suppliers have made up their minds, there is indeed only one quantity offered for sale.

Similarly, having produced a certain quantity, each supplier then makes up his mind how much he is willing to sell for $10, how much for $5, etc.

So it is indeed one to one. All the rest of the post is about what happens before they make up their minds.

However, even in a given place and a point of time, wouldn't it be that no one-to-one relationship exists at all? A lot of economics classes in college dealing with prices and pricing seem to indicate the same, and it all looks like a stealthy refutation of the law of supply.

2. Since the producer attempts to predict how many sales he can make and produces accordingly, he would consider the opportunity cost of producing an additional unit instead of continuing to produce at a lower level of production.

The producer may consider that he need only sell to the few customers who'd be willing to buy at higher price levels and ignore those who'd forego the purchase unless the price were lower. Or he may increase his production and attempt to reach more customers at a price level that could sell everything he produces.

In doing the latter, he'd give up that premium on the price he was receiving in return for larger proceeds from low-rate sales. Here, another factor comes in, and price bidded and amount offered have no independent relation of their own.

Consider - if a provider is getting $25,000 a month from five clients, and could have gotten $24,000 a month from four clients, then perhaps if demand for his services rose, and everybody was willing to pay more for his services, then he could get $26,000 a month from five clients and could have gotten $25,000 from four clients. If he had to buy a $1000 a month generator to serve the fifth client, then he was breaking even on the last client before and he is breaking even now. So he won't service more clients even after increase in prices. He'll service the same number of clients before and after.

And then if demand rose further, he could get $31,200 from six clients, and $29,700 from five clients. If he had to buy a $1500 generator to serve the sixth client, he is breaking even on him, so he simply serves an additional client for the same price as before. No particular shape for a supply curve even materializes.

All this is true, but it does not show that supply and quantity offered for sale are not one to one. It does show that the supply curve may not be strictly increasing. But that's OK, it need only be non decreasing. Meaning if the guy is making 4 widgets when selling them for $10, he will certainly make at least 4 widgets when selling them for $15.

Is the supply curve a fallacy?

Prateek Sanjay — Sun, 10 Oct 2010 17:35:09 GMT

The supply curve assumes one-to-one relationship between prices and quantity offered for sale.

Since the producer attempts to predict how many sales he can make and produces accordingly, he would consider the opportunity cost of producing an additional unit instead of continuing to produce at a lower level of production.

Economics Questions

Re: Is the supply curve a fallacy?

Is the supply curve a fallacy?