Supply

Supply can be a confusing concept for students studying economics to get their heads round, so this short blog post hopes to help out any of you who are struggling. 

You have now started to get to grips with a market, and demand, so supply will be a walk in the park! 🚶

What is Supply?

Supply, in the easiest terms, is the produce sold by different companies and firms. The quantity supplied refers to goods (like snacks🥙, clothes👚 or stationary✏️) and services (like acting in a film 📽️ or working as a chef🧑‍🍳) of different items, and how customers and firms interact with these goods depending on different prices. 

The law of supply:

The law of supply is the claim that “ceteris paribus, the quantity supplied of a good rises when the price of a good rises” Mankiw & Taylor, (2020, p.41) 

Supply, Demand and Rent

Let's have a look at supply and demand in terms of rent, to try and get our heads around it. 🏠

If the price of buying or renting homes is particularly high, like it currently is in Dublin, renting out homes is profitable for landlords. If landlords have multiple properties, when the price is high, they may be more willing to rent out more of them or SUPPLY more. By contrast, if there was a sudden drop in rent prices, or the prices of houses decreased, then landlords would not find it as profitable to rent out their properties and supply less. At really low prices, landlords may have no choice but to stop what they're doing, as it is so unprofitable, and may decide to sell their properties as they are not earning enough money. This would mean their quantity supply would be zero. 

We can also look at rent in terms of demand, if one particular area is especially prosperous; maybe it is in a good school area🎒 or has lots of public spaces like pools🏊, cinemas 🎥 and parks🛝, then more people may wish to live in the area, leading to higher demand. Demand (in terms of rent) is about how willing or happy people are to pay for housing. If fewer people are keen to rent in one area, demand for that area will be much lower, and the price often reflects this. In Dublin at the moment, there is a shortage of housing, therefore demand is very high, and supply cannot keep up with this ever- increasing demand. 

To properly analyse supply and demand together, keep reading and you can learn about 'equilibrium'.

What factors shift the Supply Curve?

Input prices 

This is due to many factors such as the cost of production-  such as the raw materials, energy🪫 and workforce needed, and the profitability of production- as producers are keen to maximise all profits, and when input processes change so do the profits. 

When the price of input rises, the production of goods is less profitable. When the price of input decreases, the production is more profitable, as it's cheaper to produce.

Cost of production (technology)🧑‍💻

Change in technology affects firm productivity, if technology is more advanced, there can be an increase in supply as production can be enhanced. 

Price of other goods in joint supply

If other goods become more profitable to sell, the supply of those other goods would increase and the supply of the original good would decrease. 

Natural and social factors

These can influence production decisions, social expectations and cost of inputs. Examples would be: war, disease😷, natural disaster🌊. If a particular material became socially unethical to use, the supply would be affected, an example of this is elephant ivory🐘, which used to be very popular but is now considered very unethical to produce.

Expectation of producer

The future affects the present. If the trajectory for certain products is looking positive, firms may choose to allocate more investment towards it, and if the expectation is less positive for the future, this could also be reflected.

Number of sellers🛍️

Due to lots of sellers being in some markets, and limited sellers in others, the number of vendors that the public has to choose between affects the supply. Less sellers make supply more profitable, as goods are unique. 

How is the curve affected: 

If the supply of the good increases⬆️: shift to the RIGHT ➡️

If the supply of the good decreases⬇️: shift to the LEFT⬅️

Movement along the curve: 

When the price changes, then there is movement along the curve to reflect quantity demanded.

(Mankiw & Taylor, 2020)

Summary:

Understand Supply in 5 points

1. Quantity Supply looks at how much of a product is available at different prices

2. The law of supply states that the quantity supply of a product increases with price 

3. The Supply curve is a graphic demonstration of this law

4. There are many factors that affect the supply curve, but if the supply of a good increases, the curve shifts to the right, and if the supply of a good decreases, the curve shifts to the left

5. Supply and demand also interact with each other, sometimes, there is a limited supply of something, for example: Taylor Swift Era's Tour Concert Tickets; there's only so many seats and so many dates she can perform. As supply and demand for tickets increase, so does the price of the tickets. 

Extension question:

💡Can you think of how Governments can help manage supply and demand when it comes to Housing?