IB Economics 2.2.3 Relationship Between an Individual Producer’s Supply and Market Supply Notes

Market Supply: Adding Up Every Firm's Supply

1. Individual supply is the supply of a single firm, showing how much one producer offers at each price.
2. Market supply is the supply of every firm in the industry added together, because what reaches the market is the combined output of all producers.
3. You build the market supply curve by horizontal summation.
   1. At each price, add up the quantities every firm supplies, then plot that total against price.
4. You add quantities across at a given price; you do not add new firms or shift any curve.
5. In the diagram, at price $P_1$ the first firm ($S_1$) supplies 100 units and the second ($S_2$) supplies 150, so market supply ($S_M$) is $100 + 150 = 250$ units.

Market Supply Slopes Upward Because Every Firm Supplies More

1. For a single firm, a higher price means higher revenue on each unit, giving it a reason to raise its quantity supplied; this positive link is the law of supply.
2. Market supply follows the same law because it is the horizontal sum of those individual curves.
3. When the price rises, every firm already in the market raises its own quantity supplied, so the totals you add at each price get larger, and the market curve slopes upward for the same reason each firm's does.
4. This works because each existing firm supplies more, not because new firms enter the market.