How to Calculate Supply Curve

Microeconomics predicts that the market price of a commodity will be the point on a graph where the supply curve intersects the demand curve. Most often these curves are seen on the blackboard or in economics texts, with little or no mention as to exactly how they are calculated. In fact, this is because supply and demand curves are rarely, if ever, actually calculated to any precision, but are almost always simply estimates. Still, it is in principle, if not in practice, possible to calculate an accurate supply curve.

Draw an X and Y axis on a piece of graph paper. Mark the Y axis "Supply" and the X axis "Price." Select a scale and units for each axis appropriate to the product or commodity in question and mark off the axes accordingly. For example, if you were calculating a curve for domestic gasoline supply, you might mark the Y axis from zero to twenty million barrels, and the X axis from zero to 10 or more dollars per gallon.

Find how many units of the product or commodity would be available for free. Although this number is usually zero, it isn't necessarily so. For example, you can occasionally find surplus or discarded items at effectively no cost. However, the total amount available will be limited, as no one will be spending money to produce new ones if the price is zero. Place a mark corresponding to the number of units available for free on the Y axis of the graph.

Find the absolute bare minimum production cost to produce a unit at maximum efficiency. Now, it may be that no one in the world is currently capable of producing the item this efficiently (yet), but still try to figure out this minimum theoretical cost, as this is the highest price for the unit at which the supply will be determined entirely by existing stock.

Figure out how many units would be available -- from the already existing stock -- at a price equal to the minimum production cost. You may also wish to find how many units would be available at various prices between zero and the minimum production cost. For certain commodities, such as antiques, the price of production is irrelevant; the availability of the goods is absolutely limited by the number already in existence. Plot each of the numbers on the graph.

Find the most efficient actual producer of the commodity in existence and its maximum production capacity. For example, there may be a plant somewhere able to turn out widgets at $1.12 each and the plant may be able to produce a maximum of 10,000 of them in a day. Add the production capacity to the total available at the next lower price you marked, and add in any additional existing stock that people would be willing to sell at this price, and plot that new total above this price on the graph.

Repeat the above for each next most efficient producer, remembering to include any existing stock that people may become willing to part with as the price rises. As the price gets higher, note that it may become profitable for even inefficient producers to enter the market, and so supply will continue to rise as price does.

Connect all the points you have plotted on the graph and you have your supply curve.

Tips

  • A similar process can be used to derive a demand curve. For each price, figure out how many units the market would be willing to buy and plot these values on the graph. The actual market price will be the point where the supply and demand curve cross each other.

References

About the Author

Tom Kantain has been writing and editing in various forms for over 20 years. He has written a regular magazine column on the philosophy of games. Kantain holds a Master of Arts in philosophy as well as a Bachelor of Laws.