Econ 101: Supply Curves and Willingness to Sell

Q:  “Does it really cost $600 or more for the manufacturer to ship a hearing aid to me versus to Costco or the VA?” Sincerely, RR

Last post considered RR’s plaint that big competitors’ product Costs are lower than his, so his profit margins are necessarily smaller than theirs, no matter how careful he is with his operating costs.  RR wanted to know why there wasn’t a level playing field and posed the Question shown above.  Today’s post continues the stem-winding effort to Answer his question.  The beginnings of an answer took the form of a prescription for Bitter Pills that firms in competitive markets must swallow:{{1}}[[1]]In hopes of clarifying rather than confusing, I’m continuing to bold Economic terms.[[1]]

  • We are Price Takers: We think we set our own prices, but the Market really dictates Price.
  • Every sale we make comes with a “marginal” cost (MC) of selling, in addition to fixed costs. 
  • Marginal Cost climbs with every sale. Price stays put or goes down. 
  • We are Willing to Sell as long as our Marginal Cost is less than Price.
  • When Marginal Cost is bigger than Price, we are not Willing to Sell.    
  • We are at the point of maximum Profit when our Marginal Cost is exactly the Price of the good we sold. MC = P.
Depending on which side you are on — producer or consumer — you can see that the processes that determine Willingness to Sell are analogous to those determining Willingness to Buy.  Just as individual Demand Curves can be put together for consumers, so individual Supply Curves can be constructed, given changes in Market Price and knowledge of a practice’s selling costs.  
 
Fig 1. Theoretical Supply Curve for RR and Competitors

If we were to construct one for RR, it would naturally show him selling fewer hearing aids when Price was low and more when Price was high.  And, just as with Market Demand Curves, one can combine the individual Supply Curves of all the suppliers in the area and come up with a  Market Supply Curve.  Figure 1 is a theoretical example of such a Market Supply Curve.  Note that some suppliers are willing to sell at very low Market Prices, so they must have lower marginal costs than RR does.  Based on RR’s complaint, Costco and the VA are likely suspects.  As the Market Price rises, many more suppliers are willing to sell–RR included–because the Price now equals or exceeds their marginal costs.  

 
Looking at Figure 1, we can restate the function in Econ-speak:  Quantity Supplied (Qs) increases as P increases — exactly the opposite of the Demand Curve where quantity demanded (Qd) decreases as P increases.  Don’t forget that we’re still in a competitive environment so Price is still being set by the Market — that’s why it goes up and down.  As it goes up, more competitors are willing–even eager–to enter. As Price goes down, many competitors are forced out of the Market.  Sad to say, but a competitive market is the levelest playing field around and RR either has to get more competitive or accept his status.  Once again, Economics lives up to its name as the Dismal Science.   
 
But Wait! There’s More!  Don’t give up, RR.  It turns out the playing field really isn’t level.  That’s not especially good news, but at least it may rouse your curiosity enough to tune in next week to see if your Question is ever going to get Answered! I promise it will be.


About Holly Hosford-Dunn

Holly Hosford-Dunn, PhD, graduated with a BA and MA in Communication Disorders from New Mexico State, completed a PhD in Hearing Sciences at Stanford, and did post-docs at Max Planck Institute (Germany) and Eaton-Peabody Auditory Physiology Lab (Boston). Post-education, she directed the Stanford University Audiology Clinic; developed multi-office private practices in Arizona; authored/edited numerous text books, chapters, journals, and articles; and taught Marketing, Practice Management, Hearing Science, Auditory Electrophysiology, and Amplification in a variety of academic settings.