Microeconomics Pt.3: What Is Supply?

A) Introduction to Supply The concept of supply is based on voluntary decisions made by producers on how much of a good to produce and sell to consumers. Supply, then, is defined as the amount of a product that would be offered for sale at all possible prices that could occur in the marketplace. Because producers receive money for the products they sell, it comes as no surprise that they will try to sell more items at higher prices and thus, make a profit. This forms the basis for the Law of Supply, which is the principle that suppliers will normally try to offer more of an item for sale at higher prices and less of an item at lower prices. The promise of high prices, and hopefully higher profits, is what lures businesses into entering the U.S. Free Enterprise Market. All suppliers of products must decide how much to offer for sale at various prices, a decision made by businesses according to what they think is best for the individual seller. However, in the end, it is consumers themselves who decide what is best for them and ultimately influence the cost and supply of businesses goods.

B) The Individual Supply Schedule and Curve Similar to the Demand Schedule, the Supply Schedule is a listing of the various quantities of a particular product supplied by a business at all possible prices in the market. Figure 1, presents a hypothetical Supply Schedule for CD’s. Figure 1 shows the quantities of CD’s that will be supplied at various prices in the marketplace. Furthermore, Figure 1 shows that when the quantity supplied goes up, the price goes up as well. The data presented in the supply schedule can also be illustrated graphically as an upward-sloping line, as shown in Figure 1. To draw this graph, all we have to do is transfer the information on the Supply Schedule over to the graph and then connect the points to form a curve. The result is a Supply Curve, a graph showing the various quantities supplied at all possible prices that might occur in the market at any given time. All normal supply curves have a positive slope that goes up from the lower left-hand corner of the graph to the upper right-hand corner. This, of course, shows that if the price of an item goes up, the quantity supplied will go up too.

The Supply Curve

C) The Market Supply Curve The Supply schedule and curve in Figure 1 shows the information of a single company. Frequently, however, we are more interested in the Market Supply Curve, which is the supply curve that shows the quantities offered at various prices by all companies that offer the product for sale in a given market. To obtain the data for the market supply curve, add the number of CD’s that individual companies would produce, and then plot them on a separate graph. In Figure 2, point A, the market supply curve represents six CD’s – four supplied by the first company and two by the second – that are offered for sale at the price of $15. In the same way, point B on the curve represents a total of nine CD’s offered for sale at a price of $20 by the same two companies. A Change In Quantity Supplied is a change in the amount supplied by a company in response to a change in price. This change is illustrated as a change on the Supply Curve which - like the case of demand – is shown as a movement along the Supply Curve Graph line. Note that the change in quantity supplied can be a increase or decrease, depending on whether more or less of a product is offered. For example, the movement from A to B in Figure 1 shows an change in quantity. If the movement along the supply curve had been from point B to point A, there would have been a decrease in quantity supplied because the number of products offered for sale went down.

D) Change in Supply Sometimes something happens to cause a Change in Supply, a situation where suppliers supply different amounts of a product for sale but the price does not change. When this happens, we look at external situations that could cause the quantity supplied to change even though the price remains the same. For example, the supply schedule in Figure 3 shows that producers are now willing to offer more CD’s for sale at the same price. Where 6 units were offered at a price of $15, now there are 13. When we take both the old and new quantities supplied of an item and plot them on a graph, it appears as if the supply curve has shifted to the right, showing an increase in supply. For a decrease in supply to occur, less items would be offered for sale but the price would remain the same, thus the supply curve shifts to the left.

Change in Supply

E) Specific Reasons for a Change in Supply These changes in supply, whether an increase or a decrease, can occur for several reasons. A change in the cost of constructive inputs of a good such as land, labor and capital can cause a change in supply. Supply might increase because of a decrease in the cost of constructive inputs of a good such as labor or packaging. If the price of the constructive inputs drops, companies are willing to produce more of a product, thereby shifting the supply curve to the right. When management of a business trains or motivates its workers, their productivity of creating a good usually goes up. If this happens, the supply curve is shifted to the right, because more of an item is being supplied by workers. On the other hand, if workers are unmotivated, untrained, or unhappy, then productivity a creating a good could decrease. If this happens, the supply curve shifts to the left because fewer goods are produced at every possible price. Furthermore, new technology tends to shift the supply curve to the right. However, new technologies do not always work correctly or can break down. Because of this, the supply curve shifts to the left. When the Federal or State Govt.’s establishes new restrictive, or tighter, regulations on the business world, the cost for production of a good can change, which in turn causes a change in supply. These restrictions often cause the supply curve to shift to left. However, less restrictions can cause the supply curve to the shift to the right. Finally, as more companies enter the market economy, the supply curve shifts to the right because more products are now being offered for sale at the same price as before. In other words, the larger the number of suppliers, the greater the market supply of an item. However, if some companies go bankrupt and leave the marketplace, fewer products are now offered for sale. This causes supply to decrease and shifts the curve to the left.

1 Versus 100 Supply and Demand Graph

The Demand Curve

The Supply Curve