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

determined, among other factors, by the profit margins in that particular business. (Desired profit is not

necessarily the same as economic profit, which will be explained in Chapter 7.) If you add these two parts

together, you get the price the firm wishes to charge. The quantity Q0 and associated price P0 give you one point

on the firm’s supply curve, as Figure 3.12 illustrates.

FIGURE 3.12 Setting Prices The cost of production and the desired profit equal the price a firm will set for a

product.

Step 3. Now, suppose that the cost of production increases. Perhaps cheese has become more expensive by

$0.75 per pizza. If that is true, the firm will want to raise its price by the amount of the increase in cost ($0.75).

Draw this point on the supply curve directly above the initial point on the curve, but $0.75 higher, as Figure 3.13

shows.
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