Supply

Is the part of economics that studies small units, such as individuals and firms. Our microeconomic concepts help explain how prices are determined and how individual economic decisions are made. For this entire unit on price, we will be applying microeconomic theory.

Supply is the amount of a product offered for sale at all possible prices, and is made up of two components: a supplier's willingness to produce and their ability to produce and sell. It is based on voluntary decisions made by producers, whether they are proprietorships working out of their homes or large corporations. Firms base their supply of products on production costs and the price they can charge for the product. Competition among sellers lowers costs and prices and encourages producers to produce more of what consumers are willing and able to buy. Competition among buyers increases prices and allocates goods and services to those people who are willing and able to pay the most for them. Because producers receive payment for their products, they have an incentive to produce more at higher prices.

The Law of Supply is the principle that more will be offered for sale at higher prices than at lower prices.

All suppliers of products must decide how much to offer for sale at various prices. They make this decision according to what is best for the individual seller, which depends on the cost of producing the goods and services. Producers will create a listing of the various quantities of a particular product supplied at all possible prices in the market. This listing they create is known as a Supply Schedule. With supply, as the quantity supplied increases, so does the price of the good. However, with a demand schedule, the quantity demanded decreases as price increases.

Sometimes something happens to cause a change in supply, a situation where suppliers offer different amounts of products for sale at all possible prices in the same market. The following are different reasons for a change in supply:

1. Cost of Resources: change in cost of product inputs (land, labor, capital). If cost of inputs decrease, such as labor or packaging, then supply increases because producers are willing to make more of the product. If the cost of inputs increases, then producers would offer fewer products for sale.
2. Productivity: change due to increased/decreased productivity in labor.
3. Technology: new technologies are more often than not beneficial in reducing the cost of production for producers, therefore increasing the amount supplied at all possible prices.
4. Taxes and Subsidies: taxes are another cost of production, therefore if taxes are higher, then cost of production increases, and supply decreases. In some situations, the government will pay out what is called a subsidy, which is a payment to an individual, business, or other group to encourage or protect a certain type of economic activity. You would see this more often in the farming industry.
5. Expectations: If producers think the price of their product will go up, they may make plans now to produce more later on.
6. Government Regulations: Increased or tighter government regulations restrict supply, therefore increasing the cost of production.
7. Number of Sellers: As more firms enter an industry, the amount supplied increases.

Markets exist when buyers and sellers interact. This interaction determines market prices and thereby allocates scarce goods and services. Prices send signals and provide incentives to buyers and sellers. When supply or demand changes, market prices adjust, affecting incentives.

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