Introduction to Supply

Supply is the amount of a good or service that a firm is willing and able to offer for sale per period of time. The Supply Curve (SC) shows the relationship between the price of a product and the quantity of the product businesses are willing to sell at that price. In the labor market, the supply of labor is the amount of time per week, month, or year that individuals are willing to spend working, as a function of the wage rate.

A Movement Along the Supply Curve

A movement along the curve only occurs if there is a change in quantity supplied caused by a change in the good’s own price. For example, if the price increases from P to P1, then the quantity supplied increases from Q to Q1. The movement along the SC is caused by price and quantity supplied.

Movement Along the Supply Curve

The Law of Supply

The Law of Supply is the direct relationship between price and quantity supplied. If everything else remains the same, then an increase in price results in an increase in quantity supplied. The positive relationship is the reason for the supply curve sloping upwards. The rationale for the positive correlation between price and quantity supplied is based on the potential increase in profitability that occurs with an increase in price.

Six Factors Affecting Supply (S)

A shift in the SC, referred to as a change in supply, occurs only if a non-price determinant of supply changes. For example, if the price of an ingredient used to produce the good, a related good, were to increase, then the SC would shift left. The following factors affect Supply and changes in these determinants will shift the SC.

Factors Affecting Supply

1. Input Prices

If the price of raw materials used in the production of a product goes down, then S will increase, i.e., shift to the right. If the price of inputs increases, then S will decrease, shift to the left.

2. Improvements in technology

If there are any major advancements in technology, then the cost of production will decrease, and S shifts to the right. For example, USB flash drives began with a storage capacity of 8 MB. These early versions were fairly expensive, but now with steady improvements, you can buy flash drives with hundreds of gigabits of capacity at a lower price.

3. Government Policy

Government policies can have a significant impact on supply. For example: If the government imposes a subsidy on the good, then S increases while a tax on the goodwill has the opposite effect of decreasing S.

4. Size of the market

If the size of the market increases, then its more likely that there will be an increase in the number of firms in the market. This increase usually tends to increase S.

5. Time

Over time, firms can increase capacity and can increase S.

6. Expectations

The concern about future market conditions can directly affect S. If the seller believes that the demand for his product will sharply increase in the foreseeable future, then the firm owner may immediately increase production in anticipation of future price increases. This increase in production would shift the SC outwards, i.e., increase supply.

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