The Economics Book

111

in short-term markets (such
as those for perishable goods), as
opposed to long-term ones (such as
for gold). He applied mathematics
to economic theories and produced
the “Marshallian Cross:” a graph
showing supply and demand as
crossing lines. The point at which
they intersect is the “equilibrium”
price, which perfectly balances the
needs of supply (the producer) and
demand (the consumer).

The law of supply
The amount of products a firm
chooses to produce is determined
by the price at which it can sell
them. If the assorted costs of
production (labor, materials,
machines, and premises) amount to
more than the market is willing
to pay for the product, production
will be seen as unprofitable and be
reduced or stopped. If, on the other
hand, the market price for the item
is substantially more than the costs
of production, the company will
seek to expand production to make
as much profit as possible. The
theory assumes that the firm has

no influence over the market

price and must accept what the

market offers.

For example if the costs of

producing a computer amount

to $200, production will be

unprofitable if the market price

of the computer drops under $200.

Conversely, if the market price of

the computer is $1,000, the firm

producing it will seek to produce

as many as possible to maximize

profits. The law of supply can be

visualized using a supply curve

(see opposite), where every point

of the curve provides the answer to

how many units a firm will be

willing to sell at a particular price.

Furthermore, there must be

a distinction between fixed and

variable costs. The above example

assumes that production can be

increased with the unit cost of

production remaining stable.

However, this is not the case. If the

computer factory can produce only

100 machines per day, yet there is

demand for 110, the producer ❯❯

See also: The paradox of value 63 ■ The labor theory of value 106–07 ■ Economic equilibrium 118–23 ■ Utility and
satisfaction 114–15 ■ Spending paradoxes 116–17 ■ Elasticity of demand 124–25 ■ The competitive market 126–29

INDUSTRIAL AND ECONOMIC REVOLUTIONS

Producers supply goods

to the market to meet

consumer demands.

If goods are not supplied

in large enough quantities to

meet demand, prices rise.

... until the market settles

at a price that balances

supply and demand.

Supply is increased

(producers make more)

to satisfy demand.

However, at some

point, supply

surpasses demand.

At this point,

prices begin to fall...

In every case the more

of a thing is offered for

sale in a market, the lower

is the price at which it

will find purchasers.

Alfred Marshall

Prices come from

supply and demand.