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Supply Function and Supply Curve

CFA® Exam Level 1, Economics

Demand and Supply Supply Function and Supply Curve

Supply is the ability and willingness of the firms to sell a specific quantity of a good or service at a given price in a given time period. This will depend on many factors such as the cost of machinery, labor cost, price of the product, prices of related products, number of firms producing the product, etc.

Supply Function

When the quantity supplied is expressed only as a function of the price of the product, other factors remaining constant, it is called a supply function. The following is a simple supply function:

Supply Function

The positive sign indicates that the price and quantity supplied are positively related, i.e., when the price increases, the quantity supplied will also increase. In the above example, for every $1 increase in price, the quantity supplied will increase by 1.5 units.

Supply Curve

The information from the supply function can be plotted as a simple graph with quantity supplied on x-axis and price on y-axis. This is called a supply curve.

The equation plotted is the inverse supply function, P = f(Qs)

A point on a direct supply curve can be interpreted as follows:

  • Maximum amount of a good that will be offered for sale at a given price
  • Minimum price necessary to induce producers to voluntarily offer a particular quantity for sale

supply-function

The supply curve illustrates the law of supply. The law of supply states that when the price of a good rises, and everything else remains the same, the quantity of the goods supplied will increase.

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Course Home
Types of Markets in Economics
Demand Function and Demand Curve
Supply Function and Supply Curve
Shifts in Demand and Supply Curves
Aggregating Demand and Supply Curves and Concept of Equilibrium
Excess Demand and Excess Supply
Stable and Unstable Equilibrium
Types of Auctions
Four Methods of Distributing Government Securities
Consumer and Producer Surplus
Effects of Government Regulation on Demand and Supply
Price Elasticity of Demand
Income Elasticity of Demand
Cross Price Elasticity of Demand
Return to Demand and Supply

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