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) is plotted to show the relationship between the price of a product and a number of 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 occurs only 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.
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.
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 increase 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 and 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 there will likely be an increase in the number of firms in the market. This increase usually tends to increase S.
Over time, firms can increase capacity and can increase S.
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.