according to their preferences and willingness to pay. Some consumers
value pizza so highly that they are willing to pay $20 for a pizza; others
are prepared to pay only $10, while some value pizza so little that they
are prepared to pay only $5. So the demand curve in Figure 5-5 is made
up of many consumers, each with their own willingness to pay. There is
nothing special about pizza, however. What is true for the demand for
pizza is true for the demand for any other product.
For each unit of a product, the price on the market demand curve shows the value to some
individual consumer from consuming that unit.Now let’s consider the market supply curve for pizza, shown in part (ii) of
Figure 5-5. Each point on the market supply curve shows the lowest
price firms are willing to accept to produce and sell a given pizza. (We
maintain our simplifying assumption that all pizzas are identical.) At
point E firms are willing to accept a price no lower than $5 for the 100th
pizza, and at point F firms are willing to accept a price no lower than $10
for the 200th pizza. The lowest acceptable price as shown on the supply
curve reflects the additional cost firms incur to produce each given pizza.
To see this, consider the production of the 200th pizza at point F. If the
firm’s total costs increase by $10 when this pizza is produced, the firm
will be able to increase its profits as long as it can sell that pizza at a price
greater than $10. If it sells the pizza at any price below $10, its profits will
decline. If it sells the pizza at a price of exactly $10, its profits will neither
rise nor fall. Thus, for a profit-maximizing firm, the lowest acceptable price
for the 200th pizza is $10.