2.2 - Supply
The definition and law of supply
Supply describes how much of a product or service producers are prepared to make available at different price levels over a set period, assuming other factors remain unchanged.
The law of supply
The law of supply explains that there is a positive link between the price of a product and the amount producers are willing to provide in a given timeframe. When the price goes up, firms tend to supply more because it becomes more profitable to do so, provided other conditions stay the same.
Features of the supply curve
A supply curve is a graphical representation that illustrates the connection between a product's price and the quantity that firms are willing to supply during a specific period.
Key characteristics of supply curves
- Axes and shape - Price appears on the vertical axis, while quantity supplied is on the horizontal axis. The curve slopes upwards from left to right, reflecting the positive relationship where higher prices encourage greater supply.
- Individual supply curve - This shows the supply from a single firm at various prices.
- Market supply curve - This combines the supply from all firms in an industry. It is created by summing the quantities each producer offers at every price level.
- Example of market supply calculation - Suppose an industry has 75 similar companies, and each is ready to supply 250 units monthly at £12 per unit. The total market supply at that price would be 18,750 units per month.
The diagram below shows a market supply curve S. At the price P1, firms are willing to supply Q1 units over the period; at the higher price P2 they are willing to supply the larger quantity Q2, which is what the upward slope means in practice.
Non-price determinants of supply
Several factors besides the product's own price can influence the amount supplied. These cause the entire supply curve to move, either increasing or decreasing the quantity available at every price.
Changes in costs of factors of production
Higher costs for inputs, such as increased wages for workers or rising prices for materials, make production more expensive. This reduces supply, shifting the curve leftwards from S1 to S2. The diagram below reads that shift across: at the unchanged price P, firms that were willing to offer Q1 units now offer only the smaller quantity Q2.
The same shift can be read upwards instead. To carry on supplying the quantity Q, firms now need the higher price P2 rather than the original P1, because every unit costs more to produce than it did before. The diagram below shows that reading.
Prices of related goods
- Goods in joint supply - These are items produced together, like beef and leather from cattle farming. If the price of beef increases, farmers raise more cattle, so more leather reaches the market at every price of leather: its supply curve shifts rightwards from S1 to S2, as the diagram below shows.
- Goods in competitive supply - These compete for the same resources, such as corn and soybeans on limited farmland. A rise in corn prices might lead farmers to grow more corn and fewer soybeans, so less is offered at every price of soybeans: the supply curve for soybeans shifts leftwards from S1 to S2, as the diagram below shows.
Indirect taxes and subsidies
- Indirect taxes are charges imposed by the government on each unit produced, raising costs and decreasing supply (leftward shift).
- Subsidies are government payments per unit produced, lowering costs and increasing supply (rightward shift).
Expectations of future price changes
If firms anticipate higher prices ahead, they might hold back current supply to sell later at better rates or expand production capacity. This temporarily decreases supply, shifting the curve leftwards in the short term.
Changes in technology
Advances in technology enable firms to produce more efficiently, reducing costs per unit and allowing greater output at the same price. This increases supply, shifting the curve rightwards.
Number of firms
An increase in the number of producers in a market expands overall supply, shifting the curve rightwards as more units are available at each price. Conversely, if firms leave the market, supply decreases, shifting the curve leftwards.
Movements along vs shifts of the supply curve
Movements along the supply curve
These happen solely due to alterations in the product's own price. For example, if the price rises, firms move up along the curve and supply more; if it falls, they move down and supply less.
Shifts of the supply curve
These occur when non-price factors change, affecting supply at all prices. A rightward shift indicates an increase in supply, where more is offered at every price. A leftward shift shows a decrease, with less offered at every price.