The supply curve for a good or service is a schedule that for any price tells us the quantity that sellers wish to supply at that price. The prices at which goods and services are offered for sale in the market depend, in turn, on the opportunity cost of the resources required to produce them.
Supply curves tend to be upward-sloping, at least in the short run, in part because of the low-hanging-fruit principle. In general, rational producers will always take advantage of their best opportunities first, moving on to more difficult or costly opportunities only after their best ones have been exhausted. Reinforcing this tendency is the law of diminishing returns, which says that when some factors of production are held fixed, the amount of additional variable factors required to produce successive increments in output grows larger.
For perfectly competitive markets—or, more generally, for markets in which individual sellers can sell whatever quantity they wish at constant price—the seller's best option is to sell that quantity of output for which price equals marginal cost, provided price exceeds the minimum value of average variable cost. The supply curve for the seller thus coincides with the portion of his marginal cost curve that exceeds average variable cost. This is why we sometimes say the supply curve represents the cost side of the market (in contrast to the demand curve, which represents the benefit side of the market).
An important terminological distinction from the demand side of the market also applies on the supply side of the market. A "change in supply" means a shift in the entire supply curve, whereas a "change in the quantity supplied" means a movement along the supply curve. The factors that cause supply curves to shift include technology, input prices, the number of sellers, expectations of future price changes, and the prices of other products that firms might produce.
Producer surplus is a measure of the economic surplus reaped by a seller or sellers in a market. It is the cumulative sum of the differences between the market price and their reservation prices, which is the area bounded above by market price and bounded below by the supply curve.
