supply due to a production cost increase. (We’ll introduce some other concepts regarding firm decision-making in
62 3 • Demand and Supply

Chapters 7 and 8.)

Step 1. Draw a graph of a supply curve for pizza. Pick a quantity (like Q0). If you draw a vertical line up from Q0 to
the supply curve, you will see the price the firm chooses. Figure 3.11 provides an example.

FIGURE 3.11 Supply Curve You can use a supply curve to show the minimum price a firm will accept to produce

a given quantity of output.

Step 2. Why did the firm choose that price and not some other? One way to think about this is that the price is

composed of two parts. The first part is the cost of producing pizzas at the margin; in this case, the cost of

producing the pizza, including cost of ingredients (e.g., dough, sauce, cheese, and pepperoni), the cost of the

pizza oven, the shop rent, and the workers' wages. The second part is the firm’s desired profit, which is
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