36 Market Power Handbook
A supply curve generally slopes upward from left to right (although
in principle it can be flat), as shown with curve S in Figure 1(a). Higher
quantities are supplied at higher prices. The higher the price an
individual supplier can obtain, the more it will supply because it can
recover the extra cost of supplying the increased volume.
The term “demand” refers to a schedule that depicts the amounts a
consumer would be willing to purchase at various prices. Market demand
at a given price is the sum across all consumers of the amounts that they
would be willing to purchase at that price. 2 One central idea in
economics is the law of demand—the empirical fact that demand
generally falls as price rises. 3 For consumer products, diminishing
marginal utility can give rise to the law of demand. Viewed from the
standpoint of consumers, we expect that as consumers purchase and
consume more units of a product, the incremental value of additional
consumption of the product diminishes. As this incremental value
diminishes, so does willingness to pay.4 Incorporating these demand
conditions into a typical market demand schedule, we associate lower
prices with larger quantities demanded. Demand curves therefore slope
downwards, as shown with curve D in Figure 1(a).
The equilibrium price in a competitive market is determined by the
intersection of the market’s demand and supply curves. In Figure 1(a),
2. See GEORGE J. STIGLER, THE THEORY OF PRICE 33-4 (4th ed. 1987).
3. See id. at 19-25.
4. See id. at 42-52.
Figure 1 A Perfectly-competitive Market
Market Supply and Demand
A Competitive Firm’s
Supply and Demand