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Summary and Introduction to Supply

At the other side of every transaction is a seller. Economists refer to the behavior of sellers as that market force of supply. It is the combined forces of supply and demand that make up a market economy. In microeconomics, the smallest unit of supply is the firm, which is analogous to the demand unit of the household. Firms operate independently of each other, making decisions about what to sell, and how much to sell, depending on the price. How do firms make their selling decisions? Once they have decided what to sell, a decision they make based on what they believe buyers will want to buy, their decision is then influenced by the market price of the goods. If a firm in Boston decides to sell warm hats, they will want to sell more hats if the going price is high than if the going price is low. Just like households, firms try to maximize their utility when making selling decisions. Whereas a buyer's utility is a complex combination of preferences, needs, and happiness, economists usually assume that sellers derive utility from profit, that is, the more money a seller makes from a sale, the happier it will be. Firms will maximize their utility by selling whatever will make them the most money. In this way, sellers' utility is somewhat easier to study and understand, since we don't have to take personal preferences into account (in theory). Instead, we look purely at price and profit.

In this unit on supply, we will look at graphical and mathematical ways to represent supply, and we will see what factors can affect supply.