Question

When discussing a supply curve, it is conventional to denote the supply function are Qs = f(P). What does this mean in terms of the causal relationship between the quantity supplied and the price of the good? Explain how this relationship between price and quantity supplied can be explained through the profit maximizing behavior of the firm producing the good.

Answer 1

Supply in economics refers the quantity of goods which a producer will sell at different levels of price. As the price of the goods increase, the supply increases. This is because the price is a factor of how much profits a firm can make. If the price which is accepted by the general public increases, each firm would try to increase the production. This is done so as to maximize returns.

The following is a diagram of the supply curve:-

It is clear from the diagram that as the price increases from P to P1, the quantity of goods supplied also increase from Q to Q1 respectively this clearly illustrates the fact that Quantity Supplied is a function directly related to price. That is as the price of goods increases the supply side also sees an increase respectively.

In numerical Terms it can be expressed as Qs = f(p) or Quantity supplied is a function of price. Further, any firm which wants to maximize must remember this rule. It clearly states that if a firm wants to maximize its profit margins, then it has to sell the highest possible quantity at the highest possible price point respectively.

The direct relationship can be explained in terms of profits which a firm makes. As the quantity supplied of the product increases with price, the profits rise.