Supply Curve: Definition, How It Works, and Example

What Is a Supply Curve?

The supply curve illustrates the correlation between the cost of a product or service and the quantity of it that is available. The supply curve is shown in a graph with the price on the left vertical axis and the quantity supplied on the horizontal axis.

The supply curve can be seen as a visual demonstration of how the law of supply and demand works. Prices increase when supply is low.

How a Supply Curve Works

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

Note that this formulation implies that price is the independent variable, and quantity is 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 more 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.

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 crop 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.

Supply Curve Example

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%, 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.

Special Considerations

The terminology surrounding supply can be confusing. "Quantity" or "quantity supplied" refers to the amount of the product 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.

What Is the Law of Supply and Demand?

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

The Bottom Line

The supply curve is a literal illustration of the relationship between supply and demand. The lower the supply, the higher the price. The demand curve is the reverse mirror image: The higher the supply, the lower the price.