Consumer choice theory purports to explain and to predict the demand “side” of markets, but an understanding of competitive economies also requires a theory of supply. And a theory is also needed concerning how the “forces” of supply and demand jointly determine economic outcomes. In this chapter I shall fill in these remaining pieces of positive microeconomic theory, before turning in chapter 4 to the normative theory of economic welfare. The material here – especially in the first four sections – should again be familiar to economists, but there are controversial claims in the last three sections, which should not be skipped.

Market supply of consumption goods and the theory of the firm

Just as market demand depends on prices, incomes, and tastes, so market supply depends on prices and technology. A higher price for x brings forth a larger supply; a lower price discourages supply. Some copper mines, for example, were closed completely when the price of copper dropped in the 1970s. Higher prices of inputs either increase the price of output or decrease its supply. Improvements in technology can make it cheaper to produce something and will increase the supply of it at a given price.

As in the case of generalizations concerning demand, empirical work and statistical analysis can add a quantitative dimension; and the results can be of practical use.