I learned in my economics class about supply curves. What doesn’t make sense to me is that how the chart in my text-book shows that goods tend to cost the most when a producer has the most supply. That doesn’t make sense. Don’t in the real world producers price their goods cheaper when they first release something, and then, later on when it becomes scarce they raise the prices up so they can produce more of to hold off the demand of the buyers? I may be wrong with my understanding about supply curves… but… it doesn’t make that much sense to me.
Yes, you seem quite confused. First off, those supply curves are solely a demonstrative tool, a theoretical construct for economics students–they don’t really exist. But what they’re supposed to show (Marshallian analysis) is (ceteris paribus) an increase in supply (shift in demand) will mean a corresponding fall in prices, while an increase in the quantity supplied will mean higher prices (higher costs). That’s it.
Thanks! That really helps my understanding of it. Of course, this isn’t always true is it? Because I know some companies like to stock goods (like Nintendo does with its game systems) at lower prices than its competitors at launch and then when it gets more game systems they price them cheaper. I realize it’s a theoretical concept… but I just have a hard time believing it to be a helpful tool in imagining the market interactions.
There are many factor that contribute to the price of a good. Also, the price histories of goods are not always the same:
Examples:
Beanie Babies started low then wen’t very high.
A CRT moniter went from high to low.
Stocks go high to low to high to low.
There isn’t any predestined path for the price of any particular good.
Sometimes you get things like “backward bending” supply curves, where supply will actually decrease as prices rise. Nations that are overly dependent on oil for income will have backward bending supply curves (all this means is that after a while they will stop producing oil, even if prices rise). Some people say labor has a backward bending supply curve.
It could also depend upon which axis of the graph you choose to use in the analysis. In the above response it was quantity–which is usually placed along the x-axis. You can also look at it in terms of the price offered for the good by the consumer (price is usually put on the y-axis). If the market price for a good is Px, then it may only produce (and thus supply the market) with Q1. But if the market price is Px + 2, quantity produced would increase to Q2; or vice versa if the market price were to drop to Px - 2.
Esuric is correct, though. The model is a tool used to explain a given hypothetical situation. As he noted, the term ceteris paribus is used because “all else equal” is the only way that a simple two variable model could work.