Question

What is the difference between the supply and the quantity supplied of a product, say milk? Explain in words and show the difference on a graph with the supply curve for milk.

Short answer

The difference between supply and quantity supplied lies in their scope. Supply refers to the overall willingness of producers to offer a product for sale at various price levels during a given period, represented by the upward-sloping supply curve in a graph. Quantity supplied, on the other hand, refers to the specific amount of a product that a producer is willing to sell at a particular price level, shown by a specific point on the supply curve. In our case, the supply curve depicts the relationship between the price of milk and the overall quantity of milk supplied, whereas a specific point (Q1) on the curve represents the exact amount of milk supplied at a particular price (P1).

Step-by-step solution

Define Supply and Quantity Supplied

Supply is the total amount of a product that producers are willing and able to offer for sale at each and every possible price over a given period. Quantity supplied, on the other hand, refers to the specific amount of a product that a producer is willing to sell at a particular price level.

Draw the Axes

Firstly, draw two perpendicular lines to represent the horizontal and vertical axes. Label the horizontal axis as 'Quantity of Milk' and the vertical axis as 'Price of Milk'. These axes will help to plot the supply curve and show the relationship between the price of milk and the quantity of milk supplied.

Draw the Supply Curve

Now, draw an upward-sloping line through the axes, starting from the origin. This line represents the supply curve and shows a direct relationship between the price of milk and the quantity of milk supplied. In general, as the price of milk increases, the quantity of milk supplied also increases.

Show a Specific Quantity Supplied

Choose a price level on the vertical axis, say P1. From P1, draw a horizontal line to the right until it intersects the supply curve. From this intersection point, draw a vertical line down to the horizontal axis. Label this intersection point as Q1. This point represents the quantity of milk supplied at price P1, which is the specific quantity supplied.

Explain the Difference Using the Graph

The supply curve represents the overall supply of milk at various price levels, indicating the potential quantities supplied at different prices. On the other hand, the specific point Q1 at which the vertical line intersects the horizontal axis represents the exact quantity of milk that will be supplied at the price P1. This highlights the distinction between supply (represented by the entire curve) and quantity supplied (reflected by a specific point on the curve depending on the price level).

Key concepts

Supply Curve

Imagine a farmer who has a vast amount of milk to sell. The amount of milk that the farmer is ready to sell at different price points is depicted by what we call a supply curve. This graphical representation can be likened to a roadmap that shows us how much milk (or any good for that matter) will be available at different levels of pricing.

To help simplify, let's take a look at a fair happening in town where milk is being sold. If the organizers announce that the price of milk has increased, our farmer would be willing to sell more milk because the profit is higher. On the graph, this situation is reflected in an upward sloping line called the supply curve – higher prices lead to an increase in the quantity of milk that the farmer is willing to supply.

No two supply curves are the same, as they can be steep or flat, which is crucial when discussing the concept of price elasticity of supply. Whether the farmer has a little or a lot of extra milk to sell when the price changes, tells us how responsive the supply is to the price changes. In essence, the supply curve is a visual storyteller of the relationship between price and the quantity of milk supplied to the market.

Price Elasticity of Supply

Now let's dive into something called the price elasticity of supply. It sounds like a big, complicated term, but it’s quite an intuitive concept once you break it down. Price elasticity of supply measures how much the quantity supplied of a product changes in response to a change in price.

To make it even simpler, imagine a giant rubber band. If this band is very stretchy, it's like a product with high elasticity. Small tugs on the price can produce big changes in the quantity supplied. Back to our milk example, high elasticity would mean that if the price of milk slightly increased, our farmer would dramatically increase the quantity of milk available for sale.

But if the rubber band is tough and doesn't stretch easily, it represents low elasticity; even big changes in price won't affect the quantity supplied much. Our farmer may not have enough cows or space to quickly respond to a price increase with more milk. This elasticity is crucial for businesses to understand because it affects their ability to react to market changes and can impact their profitability.

Economic Equilibrium

Lastly, we come to the real star of the show, economic equilibrium. Imagine a dance floor where milk suppliers (like our farmer) and milk drinkers (like you and me) are trying to find the perfect dance partner. When a state of economic equilibrium is reached, it's like everyone has found their best match – there's no one left waiting on the sidelines.

In economic terms, we reach equilibrium when the quantity of milk that the farmer wants to sell exactly matches the quantity that consumers want to buy, and this happens at a specific price. At this point, everyone is satisfied: the market is 'cleared', and there’s neither surplus milk nor unmet demand.

On a graph, this equilibrium point is where the supply curve (our farmer's milk-selling plans) and the demand curve (how much milk consumers want to drink) intersect. If the price is too high, milk is left unsold, creating a surplus. If it's too low, there's not enough to go around, leading to a shortage. The equilibrium price is the 'Goldilocks' price, ensuring the amount of milk our farmer wants to sell is just right for what milk drinkers want to buy, keeping the market stable and efficient.