SUPPLY

Supply is derived from a producer's desire to maximize profits. Profit is the

difference between revenues and costs.

Resources and technology determine what it is possible to produce. Supply

reflects a decision about which technologically feasible items to produce.

 The supply of a good or service refers to the quantities of a good or a

service that producers are willing and able (ready) to produce (sell) at
different prices in a given time period, ceteris paribus.

Supply is an expression of seller’s plans or intentions – an offer to sell – not a

statement of actual sales.

 Supply is represented by the whole supply schedule and the entire supply
curve

 Supply curve is a graphical representation of the supply schedule that

shows
the relationship between quantity supplied of a good and its price when all other
influences on producer's planned sales remain the same.

 We can view the supply curve as a "minimum-price-supply" curve.

 For each quantity, the supply curve shows the minimum price a supplier
must receive in order to produce that unit of output. When quantity supplied
rises it increases the cost of production. So price of the good has to increase
to compensate for the increased marginal cost.
  The quantity supplied (Qs) of a good or service is one particular amount
that producers plan to sell during a given period of time at a particular price
assuming other factors influencing the production of goods and services are
constant.

 Quantity supplied is represented by a specific line in the supply schedule

and a specific point on the supply curve.

 Time is important element here. Without time dimension, we cannot tell

whether the quantity supplied is large or small.

The Law of Supply

 The law of supply shows a positive (direct) relationship between price and
quantity supplied.
 The quantity of a good supplied in a given time period
increases as its price increases, ceteris paribus.

 The law of supply results from the general tendency for the marginal cost of
producing a good or service to increase as the quantity produced increases.

 Producers are willing to supply only if they at least cover their marginal cost
of production.

 Because of the law of supply, supply curve has positive slope (is upward
sloping.)
Change in Quantity Supplied vs. Change in Supply (Movements vs. Shifts)

A) Change in the quantity supplied

Quantity supplied changes as a result of the change in the good own price and
referred to
as movement along the same supply curve.

Price is not constant along a given supply curve. An increase in price from P1 to
P2 increases the quantity supplied from Q1 to Q2. A decrease in quantity supplied
would be caused by the price decreasing, say from P1 to P3.

Changes in supply

Change in supply exists because of changes in one or some of non-price

determinants of supply, which results in shifting the supply curve.

An increase in supply results in a rightward shift and a decrease in the supply

results in a leftward shift.

At a price of P1 in the graph, when the supply curve shifts right from S1 to S2,
then quantity increases from Q1 to Q2.

When the other factors cause the supply curve to shift left, from S1 to S3, the
amount supplied decreases from Q1 to Q3.

Factors Affecting Supply

Aside from the price of the good, there are other factors, which affect the
suppliers' willingness and ability to supply a good or service.

 Determinants of market supply include:

1. Change in the Cost of Factors of Production

A supplier combines raw materials, capital, and labor to produce the
output. The costs of production are the primary determinant of supply.

If the price of resource used to produce a good rises, the minimum price
that a supplier is willing to accept for producing each quantity of that good rises.

So a rise in the price of productive resources decreases supply and shifts the supply
curve leftward.

Conversely, if input costs decline, firms respond by increasing output,

which will in turn increase supply (supply curve shifts rightward).

2. Changes in Technology

New technologies means that either production increases with the same
level of resources or that fewer resources are needed to produce the same

level of output. If fewer resources are needed to produce the same level
of output when technology increases then production costs will fall
causing supply to increase (shift right).

Computer prices, for example, have declined radically as technology has

improved, lowering their cost of production.

Advances in communications technology have lowered the telecommunications

costs over time. With the advancement of technology, the supply curve for
goods and services shifts to the right.

3. Changes in the Price of Related Goods:

Similar to demand where goods are related in consumption, goods are also
often related in production. The prices of related goods or services that firms
produce influence supply. It depends on whether the goods are substitutes
or complements.

Substitutes in production:

o The two goods are substitutes in production when both goods can be
produced using the same resources. For example, corn and wheat, leather
built and leather shoes.

o A rise in the price of corn will increase the quantity supplied of corn and,
as a result, decrease the supply of wheat and shift its supply curve
leftward.

Complements in production:

o The two goods are complements in production if one good is produced

as a by-product of the other good.

o For example, an increase in the production of gasoline will increase the

production of other goods, like kerosene and motor oil. This is because
gasoline is produced by refining crude oil. The refining process produces
a fixed proportion of a number of products including gasoline, kerosene
and motor oil.

4. Expectations about the Future:

If the price of a good is expected to fall in the future, current supply

increases and the supply curve shifts rightward.

If firms anticipate a rise in price, they may choose to hold back the
current supply to take advantage of the higher future price, thus
decreasing market supply and the supply curve will shift leftward.

5. Number of Sellers:

The larger the number of suppliers of a good, the greater is the supply of
the good. An increase in the number of suppliers shifts the supply curve
right ward.