Supply

Concept and Definition of Supply

  • Supply refers to the quantity of a good or service that producers are willing and able to sell at different prices in a given time period.
  • The law of supply states that there is a direct relationship between price and quantity supplied, meaning as the price of a good increases, so does the quantity supplied, all else being equal.
  • Supply is illustrated through a supply curve on a graph, where price is on the y-axis, and quantity supplied is on the x-axis.

Determinants of Supply

  • The price of the commodity: If the price of a good increases, producers are incentivised to supply more of the good, assuming all other factors remain constant.
  • Cost of production: Changes in the costs of inputs like labour, raw materials, or equipment can affect the level of supply. Higher costs of production may reduce supply and vice versa.
  • Technological changes: Improvements in technology can increase productivity and reduce costs, leading to an increase in supply.
  • Future price expectations: If producers expect the price of a good to rise in the future, they may reduce their current supply to sell more in the future at the higher price.
  • Government policies: Policies such as subsidies, taxes, and regulations impact the cost of production, directly influencing the level of supply.

Shifts in the Supply Curve

  • A shift to the right in the supply curve represents an increase in supply. This could be due to factors such as advancement in technology, a decrease in costs of production, or favourable government policies.
  • A shift to the left in the supply curve represents a decrease in supply. This could occur from higher costs of production, adverse technological changes or unfavourable government policies.

Price Elasticity of Supply (PES)

  • PES measures the responsiveness of quantity supplied to changes in the price of a good.
  • If supply is elastic, a small change in price leads to a bigger percentage change in quantity supplied.
  • If supply is inelastic, a change in price results in a smaller percentage change in quantity supplied.
  • Factors influencing PES include the availability of factor inputs, time period (short run vs long run), mobility of factors of production, and the capacity for producers to hold stocks.

Interaction of Supply and Demand

  • Supply and demand interact to determine the equilibrium price and quantity in a market.
  • If supply exceeds demand at a particular price (surplus), this puts downward pressure on price.
  • If demand exceeds supply at a certain price (shortage), this applies upward pressure on the price.
  • In a state of equilibrium, the quantity supplied equals the quantity demanded, resulting in market clearing.