Determinants of Supply

Supply - definition

Quantity of a good or service that a supplier is willing and able to produce at a given price during a given time period

What does a supply curve look like

Why is a supply curve upwardly sloping?

Price and quantity supplied have a positive relationship.

Why do price and QS have a positive relationship?

If price increases, it’s more profitable for firms to produce the good, so supply increases

High prices also attract more new firms as it is profitable

With larger outputs, firms’ costs increase so prices must rise

What do movements along the curve show?

An increase/ decrease in price, which cause an increase / decrease in quantity demanded

Extension/contraction

What do shifts in a supply curve show?

A change in quantity supplied at the same price, caused by other factors

Leftward shift = Inward (less QS)

Rightward shift = outward (more QS)

What are factors that shift the supply curve (7)

1. Changes to costs of production

2. Government policy

3. Technology

4. Change in no. of firms in the industry

5. Weather events

6. Future price expectations

7. Goods in joint or competitive supply

Changes to costs of production: How do they affect supply?

If prices to produce increase, firms will respond by decreasing supply

Inverse relationship

Government policies: Two types

1. Subsidies

2. Taxes

Subsidies: How do they affect supply?

Impacts cost of production, more subsidies = cheaper to produce = more supply

Positive relationship

Taxes: How do they affect supply?

Opposite to subsidies, higher taxes = higher cost of production = lower supply

Inverse relationship

Technology: How does it affect supply?

New technology increases productivity and efficiency, which decreases production costs, so supply increases

Aging technology has the opposite effect, more inefficient

Changes in the number of firms in the industry: How do they affect supply?

More firms in an industry = higher supply, as more producers

Direct relationship

Weather events: How do they affect supply?

Extreme weather can cause a supply shock usually in agricultural markets, which will decrease supply

Conversely, good conditions will increase supply of crops

Future price expectations: How do they affect supply?

If firms expects the price of a good/service to increase in the future, they will increase supply and vice versa.

Direct relationship

What are goods in joint supply and how does this affect supply?

Ones involving a process which yields multiple outputs, like beef and leather

If supply of beef increases, maybe due to price, supply of leather will also increase.

Positive relationship

What are goods in competitive supply and how does this affect supply?

When alternative products can be made with the same resources, e.g. a farmer can grow wheat or potatoes

When supply of one good (potatoes) increases, the supply of the other good (wheat) will decrease.

Inverse relationship