Supply is the quantity of a good or service that producers are willing to sell at different prices during a given period.
Market supply is the sum of the quantities supplied by all individual producers.
Law of Supply
Holding other factors constant, when the price of a product increases, quantity supplied increases. When the price decreases, quantity supplied decreases.
Therefore, price and quantity supplied are positively related.
Supply Curve
A supply curve shows the relationship between price and quantity supplied.
It generally slopes upward from left to right.
Producers are willing to supply more at higher prices because of the opportunity to earn greater profits.
Supply Function
The relationship between supply and its determinants can be represented as:
Where:
- = quantity supplied
- = price of the commodity
- = price of other goods
- = price of factors of production
- = state of technology
- = taxation policy
- = goals of the firm
Determinants of Supply
Main factors that can shift the supply curve include:
- Input costs
- Size of the industry / number of firms
- Technology
- Prices of other goods
- Prices of factors of production
- Government policies such as taxation
- Goals of firms
Input Costs
Input costs increase → Supply decreases → Curve shifts left.
Input costs decrease → Supply increases → Curve shifts right.
Size of the Industry
More firms enter the industry → Supply increases → Curve shifts right.
Firms leave the industry → Supply decreases → Curve shifts left.
Technology
Improved technology reduces production costs and increases supply.
Technology improves → Supply increases → Curve shifts right.
Change in Quantity Supplied
A change in the price of the good itself causes a movement along the same supply curve.
- Price increases → Quantity supplied increases.
- Price decreases → Quantity supplied decreases.
Change in Supply
A change in a non-price determinant causes the entire supply curve to shift.
Increase in Supply
Supply curve shifts right.
Decrease in Supply
Supply curve shifts left.
Supply Schedule
A supply schedule is a table showing the quantities producers are willing to supply at different prices.
As price increases, quantity supplied generally increases.
Movement Along vs Shift of Supply Curve
| Change | Result |
|---|---|
| Change in price of the good | Movement along supply curve |
| Change in input costs | Shift of supply curve |
| Change in technology | Shift of supply curve |
| Change in number of firms | Shift of supply curve |
| Change in taxation | Shift of supply curve |
