Managerial Economics and Strategy, 2/e

2.2 Supply

Knowing how much consumers want to buy at any given price is not enough by itself to tell us the market price and quantity. We also need to know how much firms want to supply at any given price. Firms determine how much of a good to supply given the price of that good and other factors, including the costs of producing the good. Usually, we expect firms to supply more at a higher price. Before concentrating on the role of price in determining supply, we describe the role of some other factors.

Costs of production (how much the firm pays for factors of production such as labor, fuel, and machinery) affect how much of a product firms want to sell. As a firm’s cost falls, it is usually willing to supply more, holding price and other factors ...