unit 2 - supply

supply

The quantity that sellers are willing and able to sell at any given price and over a given period of time.

law of supply

The Law of Supply states that there is a positive or direct relationship between price and quantity supplied. As price increases, the quantity supplied also increases when all other non-price factors remain at ceterius paribus.

individual supply

An individual supply curve shows the relationship between the product price and the quantity supplied by an individual seller.

Market supply

• A market supply curve shows the relationship between the product price and the quantity supplied by all sellers in a particular market.

• The market supply curve is the horizontal sum of the individual supply curves of all sellers in a particular market.

Extension Supply

An increase in the price of the product increases the potential profit for firms, providing an incentive to increase the quantity supplied. Therefore, there is an extension of supply, shown by a movement up along the supply curve.

Contraction Supply

A decrease in the price of the product reduces the potential profit for firms, providing less incentive to supply the product. Therefore, there is a contraction of supply, shown by a movement down along the supply curve.

factors

production costs, technology, price of substitutes or complements, joint supply, expectations, number of sellers, indirect taxes and subsidies

production cost

An increase in production costs reduces firms’ profit margins, decreasing their willingness and ability to supply the product. Therefore, supply decreases, shifting the supply curve left.

A decrease in production costs increases firms’ profit margins, increasing their willingness and ability to supply the product. Therefore, supply increases, shifting the supply curve right.

technology

An improvement in technology increases productivity and reduces the cost of production. Therefore, supply increases, shifting the supply curve right.

A deterioration in technology reduces productivity and increases the cost of production. Therefore, supply decreases, shifting the supply curve left.

joint supply definition

Joint supply of two or more products refers to production of goods that are derived from a single product, so that it is not possible to produce more of one without producing more of the other.

joint supply shifts

An increase in the supply of one jointly supplied good results in an increase in the production of the other good. Therefore, supply of the other good increases, shifting its supply curve right.

A decrease in the supply of one jointly supplied good results in a decrease in the production of the other good. Therefore, supply of the other good decreases, shifting its supply curve left.

expectations

If firms expect the price of a product to increase in the future, they may withhold stock from the market and sell it later at a higher price. Therefore, current supply decreases, shifting the supply curve left.

If firms expect the price of a product to decrease in the future, they may increase current sales before the price falls. Therefore, current supply increases, shifting the supply curve right.

subsidy

An increase in government subsidies reduces firms’ production costs, increasing their profitability and incentive to supply. Therefore, supply increases, shifting the supply curve right.

A decrease in government subsidies increases firms’ production costs, reducing their profitability and incentive to supply. Therefore, supply decreases, shifting the supply curve left.