2.2 Supply

Supply is a fundamental concept in economics that refers to the quantity of a good or service that a producer is willing and able to offer for sale at a given price in a given time period. Supply represents the side of the market relationship that is made up of sellers who supply goods and services to buyers. In this guide, we'll be investigating the supply curve and understanding its properties and determinants.

The Law of Supply is the fundamental principle behind understanding the supply curve. The Law of Supply states that as the price for a good increases, the quantity supplied increases, and vice-versa. This is because higher prices make it more profitable for producers to offer more of the good or service for sale. Unlike the Law of Demand, there aren't a number of effects that lead to an upward sloping supply curve. Instead, as we'll see in future units, the supply curve is connected to the marginal cost of production. As costs rise, so do prices, which is because of the law of supply. Let's take a look at what this looks like visually:

Like before, the supply curve is part of a market, so quantity goes on the x-axis and price goes on the y-axis. This is because, as we've discussed, a market relates prices to quantities.

Because quantity supplied increases as price increases (by the law of supply), the supply curve is an upward sloping curve. Like before, this can either be a curve or a straight line, just make sure it's always increasing.

There are several determinants of supply that cause the shift to the right (increase in supply) or the shift to the left (decrease in supply). The curve shifts because at all price levels, the quantity supplied has changed. Like with demand, changes in price do not shift the supply curve, but rather change the quantity supplied.

1. Resource costs: The cost of the inputs or resources used to produce a good or service can affect the supply of that good or service. If the cost of resources increases, it may become more expensive to produce the good or service, which can lead to a decrease in the supply.

2. Taxes and Subsidies: Government actions can increase or decrease supply. A tax on a good may discourage production of that good, leading to a decrease in supply, while a subsidy may encourage production, leading to an increase in supply.

3. Technology / Productivity: Advances in technology or an increase in productivity can lead to an increase in the supply of a good or service. For example, if a company is able to produce more goods using the same amount of resources due to technological improvements, it can increase the supply of that good.

4. Expectations: The expectations of producers about future market conditions can also influence the supply of a good or service. For example, if producers expect a recession in the future, they may decrease production.

5. Number of Sellers / Producers: The number of sellers or producers in the market can also affect the supply of a good or service. A larger number of sellers may lead to increased competition, which can lead to an increase in supply.