b. Supply - analysing the sellers' behaviour

The sellers in this market are the osteopaths we described earlier. We assume that these osteopaths want to maximise their profits. What are profits and how can they be maximised? Osteopaths earn money (revenue) by selling their services e.g. by massaging away muscular strains. Out of this revenue they need to pay for the factors they use to produce the treatment (costs) e.g. pay their receptionist, pay the rent or pay for a new ultrasound machine. Profit is the excess of revenue over costs.

Maximising profits

Figure A - The supply curve of osteopathy treatments

Seeking to maximise profits leads each osteopath to want to sell more care at higher prices. There is a reliable and predictable positive relationship between price and quantity supplied. Formally, supply is defined as the quantity of a good or service that a population of sellers is willing and able to sell at every conceivable price. This positive relationship is shown graphically by the supply curve on the left - SS. If the price changes there is a movement along the supply curve (see Figure A). At price P the osteopath population is prepared to sell Q treatments (see Figure B). When the price rises to P' the osteopath population is prepared to sell Q' treatments (see Figure C) - this might be because more people become osteopaths when it becomes a more lucrative job.

Figure BFigure C

Change in costs

If the level of factor costs changes then the supply curve will shift. For example nurses' wages could go up or the rent could fall. Let's look at the effects of these.

Figure D

In Figure D, SS is the initial supply curve for treatments. Imagine that nurses' wages rise, pushing up osteopaths' costs. The osteopaths react by being prepared to supply fewer treatments (see Figure E) at each price (this may be because there are fewer osteopaths). At a price such as P' osteopaths are now only prepared to sell Q" treatments rather than Q'. The supply curve shifts inwards to S'S' (see Figure F).

Figure EFigure F

Now imagine that rents fall. The profit of osteopaths will increase for each treatment. The osteopath population will react by being prepared to supply more treatments  (see figure G) at each price. At the price P' osteopaths are now prepared to sell Q"' treatments rather than Q'. The supply curve shifts outwards (see Figure H).

Figure GFigure H