Chapter 13 - Supply: cost and price

Abstract

This chapter provides an overview of the factors that determine the supply of a commodity. Cost controls supply in two ways. It controls the volume of output that each firm finds it profitable to produce and it controls the number of firms that can carry on at a profit. If the cost of producing a commodity rises, other things remaining the same, the supply tends to contract for two reasons—first, because each firm will cease to manufacture units of output that no longer pay their way and, second, because some firms will find it necessary, or advantageous, to abandon production of the commodity altogether. The marginal cost controls the supply of the commodity. It equals the change in the total costs of production when output is changed by a tiny amount, divided by that change in output. The marginal cost of a commodity is defined when the marginal costs of producing it are equal across all firms doing so. The behavior of prices and costs differs from one market to another and what is true in one market is not true in another.