1.5 Supply

Essential Question:

What influences the supply of goods in a competitive market?

Learning Objectives

MKT-2.C
- A. Define (using graphs as appropriate) the law of supply
- B. Explain (using graphs as appropriate) the relationship between the price of a good or service and the quantity supplied.
MKT-2.D
- Explain (using graphs as appropriate) the determinant of supply

Essential Knowledge

MKT-2.C.1
- The law of supply states there is a positive relationship between price and quantity supplied, leading to an upward-sloping supply curve
MKT-2.D.1
- Factors that influence producer supply, such as changes in input prices, cause the market supply curve to shift

Price also affects the quantity of an item that is supplied. The term supply refers to the amount of a good or service a producer is willing and able to sell at a given price. Producers in a free market compete with each other for profits, so businesses shift their resources from less-profitable goods or services to those that are more profitable. This causes the supply of more- profitable goods and services to increase while the supply of less-profitable ones decreases.

The Law of Supply

The law of supply states that, when all other factors are equal, there is a positive relationship between the price and quantity supplied. In other words, the quantity of a good or a service supplied varies directly with its price, so an increase in price usually leads to an increase in the quantity supplied.

Not only will existing producers increase their output at the higher price but high prices will cause new producers to enter the market. Conversely, a decrease in price usually decreases the quantity supplied.

Determinants of Supply

Determinants of supply are factors influence the total supply for a good or service, leading to a shift in the supply curve. There are six that are particularly important:

Change in Prices of a Related Good or Service
Change in Technology
Change in Price of Resources
Changes in Number of Producers
Change in the Expectations
Change in Government Policies

Graphing Supply

The supply of a good or service can be shown in a chart of data or in a line graph. Either provides a simple way to analyze how much producers are willing to provide at various prices

A table showing the relationship between the price of a good or service and the quantity supplied when all other dereminants are equal is called a supply schedule.

A supply schedule, like a demand curve can be plotted on a graph. The price is plotted on the vertical axis (y-axis) and the quantity supplied at that price on the horizontal axis (x-axis). By connecting the points, we have a upward-sloping line that relates the price and quantity demanded. This is called the supply curve.

Any change in determinants of supply can shift the demand curve to the right or left. When a change increases the quantity supplied at every price, the curve will shift to the right- an increase of supply.

If there is a reducation of supply at every price, the supply curve shifts to the left and is called a decrease in supply.

Vocabulary

Summary of the Topic

The supply of goods in a competitive market is influenced by several factors. These factors determine how much producers are willing and able to offer for sale at different prices. The main influences on supply include:

1. Price of the Good:

According to the Law of Supply, as the price of a good increases, the quantity supplied typically increases. This is because higher prices provide an incentive for producers to produce more of the good, as it becomes more profitable to do so. Conversely, if the price falls, producers are less willing to supply the good, and the quantity supplied decreases.

2. Production Costs:

Changes in the cost of inputs (such as raw materials, labor, and energy) can affect the supply. If production costs rise (for example, due to higher wages or more expensive raw materials), producers may supply less of the good because it becomes more costly to produce. If costs decrease, production becomes cheaper, and producers may be willing to supply more.

3. Technology:

Technological improvements can make production more efficient, reducing the cost of producing goods. As a result, producers can supply more at every price level, shifting the supply curve to the right. Conversely, if there is a technological setback or loss of efficiency, supply may decrease.

4. Number of Producers:

An increase in the number of producers in the market increases the overall supply of the good. If more firms enter the market and begin producing the good, the total supply will rise. On the other hand, if firms exit the market, the supply will decrease.

5. Expectations of Future Prices:

If producers expect future prices to be higher, they may hold off on supplying some of their goods today to sell them at a higher price in the future. Conversely, if producers expect future prices to fall, they may increase their supply today in order to sell before prices drop.

6. Government Policies:

Taxes and Subsidies: Government interventions like taxes or subsidies can affect supply. Higher taxes on production can reduce supply by making production more expensive, while subsidies (financial assistance) can increase supply by lowering production costs.

Regulations: Stricter regulations, such as environmental laws or safety standards, can increase the cost of production, thus reducing supply. Looser regulations may reduce costs and increase supply.

7. Price of Related Goods:

If a producer can switch between producing different goods, the price of related goods can influence supply. For example, if the price of a substitute good (a good that can be produced using similar resources) increases, producers may allocate more resources to its production, reducing the supply of the original good. On the other hand, if the price of a complementary good rises, it could incentivize increased production of both goods.

8. Natural Conditions:

Factors like weather conditions, natural disasters, and seasonal changes can affect the supply of certain goods. For example, a drought may reduce the supply of agricultural products, or a natural disaster could disrupt production and reduce supply.

In summary, the supply of goods in a competitive market is influenced by a variety of factors, including the price of the good, production costs, technology, the number of producers, expectations about future prices, government policies, the price of related goods, and natural conditions. These factors cause the supply curve to shift, either increasing or decreasing the quantity supplied at each price level.

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