What is Supply?

Supply  How many hours do you spend studying every night?  How many hours would you study if you were paid $1 an hour?  $10 an hour?  If you would study more at a higher price, you are following the Law of Supply.

Supply  What is the nature of demand?  Supply is almost the mirror image of demand.  It describes the other half of the market which provides products for those who demand them.

Supply  Do YOU play a role as producers in the market?  Producers provide services as well as goods.  Does anyone have a part-time job, do baby-sitting, or household chores for allowance?  Then YOU are a producer supplying an economic product, your labor, to buyers in the marketplace.

Supply  When economists consider demand, they are interested in the desire, ability, and willingness to purchase a product over a wide range of prices.  Remember, economists are concerned with the market as a whole.  Therefore, Supply is the quantity of a product or service that sellers will provide at all possible prices that could prevail in the market.  For example, the supply of TV sets is the number of sets manufacturers will likely produce if the prevailing market is $700, $500, $300, or any other prices.

Supply  Everyone who offers an economic product for sale is a supplier.  YOU will be more willing to supply more labor at a higher wage than you would for a low one.  It is reasonable to predict that the higher the price, the greater quantity the seller will offer for sale.

Supply  Supply Schedule is a listing that shows the quantity supplied at each and every price.  Supply Curve shows the same information in the form of a graph.  It always slopes upward to the right.  This is the opposite of the demand curve.

Supply A supply schedule and curve.

The Law of Supply  Thus, the Law of Supply states that the quantity supplied varies directly with its price.  In other words, if prices are high, suppliers will offer greater quantities for sale.  If prices are low, they will offer smaller quantities for sale.

Change in Quantity Supplied  The amount that producers bring to market at any one price is called the quantity supplied.  A Change in Quantity Supplied is the change in amount offered for sale in response to a change in price.  This is shown on the supply curve by a movement along the curve.

Change in Quantity Supplied  For example, 350 T-shirts are supplied when the price in $30.  If the price decreases to $24, 300 T-shirts are supplied.  If the price then changes to $21, 240 T-shirts are supplied.  These changes illustrate a change in the quantity supplied.

Change in Supply  Sometimes producers offer different amounts of products for sale at all possible prices in the market. This is known as a Change in Supply.  This is shown on the supply curve by a shift in the entire curve.

Change in Supply  Reasons for change in supply:  1. Cost of Inputs – In the T-shirt example, if the cost of ink or cotton goes down, then producers can produce more t-shirts at each and every price. The supply curve would shift right.  If the cost of inputs increases, producers would not be willing to produce as many shirts at each and every. The supply curve would shift left.

Change in Supply  2. Productivity – If management trains workers to be more efficient then productivity increases.  The supply curve shifts to the right because more shirts are produced at every possible price in the market.

Change in Supply  3. Technology – New technology almost always shifts the curve to the right.  The introduction of a new machine, chemical, or industrial process can affect supply by lowering the cost of production.  New technology does not always work as expected. Equipment might break down or parts may be difficult to obtain.

Change in Supply  4. Number of Sellers – The supply curve represents all producers. Thus, when new suppliers enter the market supply increases, or shifts to the right.  If some sellers leave the market, fewer products are offered for sale at all possible prices.  Supply decreases, and the supply curve shifts to the left.

Change in Supply  5. Taxes and Subsidies – They have the same impact as cost of inputs.  If the producer’s inventory is taxed, the cost of production increases. (Shift to the left)  If the government provides subsidies, the cost of production decreases. (Shift to the right)

Change in Supply  6. Expectations – The anticipation of future events. If producers expect future price increases, they will withhold some of the supply, shifting the curve left.  If producers expect future price decreases, they will flood the market, shifting the curve right.

Change in Supply  7. Government Regulations - When government places mandates on producers, the cost of inputs increases, shifting the curve to the left.  For example, when government mandates new auto safety features such as stronger bumpers, air bags, and emission controls, cars cost more to produce.

Change in Supply  What do you think happens to the supply curve in the following situations and why?  1. Cost of materials used to make CDs fall.  (Shifts to right because supply increases because price of inputs falls.)  2. New training methods improve worker efficiency.  (Shifts to right because supply increases due to increased productivity.)

Change in Supply  3. Innovative process for pressing CDs introduced.  (Shifts to right because supply increases because new technology lowers production costs.)  4. Leading CD producer goes out of business.  (Shifts of left because supply decreased by suppliers leaving the market.)

Supply Elasticity  Just as demand has elasticity, there is elasticity of supply.  Supply Elasticity tells how much a change in price affects quantity supplied.  Products that require large amounts of money and technology to change production tends to be Inelastic.  Products made quickly without large amounts of money and technology is elastic. (Candy and toys)