Market Mechanism - Supply

Supply

  • Supply: total amount of a good or service that producers are willing and able to sell at various prices over a period.
  • Represents the price–quantity relationship; shown by a supply curve (graph).
  • Influenced by: production costs, technology, expectations of future prices, number of sellers, and government policies.
  • Law of supply: when all else equal, price ↑ leads to quantity supplied ↑; price ↓ leads to quantity supplied ↓.

Supply Schedule

  • A supply schedule is a tabular statement of quantities supplied at various prices over a period.
  • Types:
    • Individual supply schedule: for a single producer.
    • Market supply schedule: sum of all individual supplies at each price.

Supply Curve

  • Graphical representation of the supply schedule.
  • Individual supply curve: plot of quantity supplied by one producer; slopes upward (positive relation with price).
  • Market supply curve: obtained by horizontally summing individual supply curves; also upward sloping.
  • Market supply curve (SM) is usually flatter than individual curves because it aggregates many producers.

Movement along the Supply Curve vs Shift in the Supply Curve

  • Movement along the curve (change in quantity supplied): caused by a change in the own price of the good, holding other factors constant.
    • Expansion in supply: price rises, quantity supplied increases along the same curve.
    • Contraction in supply: price falls, quantity supplied decreases along the same curve.
  • Shift in the supply curve (change in supply): caused by a factor other than the own price, causing the entire curve to move.
    • Increase in supply (shift right): at the same price, quantity supplied increases; new curve lies to the right.
    • Decrease in supply (shift left): at the same price, quantity supplied decreases; new curve lies to the left.

Increase in Supply (Rightward Shift)

  • Causes (factors other than own price):
    • Decrease in price of related goods
    • Advancements in technology
    • Decrease in cost of factors of production
    • Fall in excise duty
    • Rise in subsidies
    • Increase in number of firms
    • Improvement in business expectations
    • Change in producer goals (towards maximizing supply)
    • General favorable economic conditions/ policy

Decrease in Supply (Leftward Shift)

  • Causes (factors other than own price):
    • Increase in price of related goods
    • Obsolete technology
    • Increase in cost of factors of production
    • Rise in excise duty
    • Fall in subsidies
    • Decrease in number of firms
    • Change in producer goals away from expansion
    • Deterioration in business expectations

Price Elasticity of Supply (PES)

  • Definition: measure of the responsiveness of quantity supplied to a change in the good's own price.
  • Formula:
    E<em>s=%ΔQ</em>s%ΔP=ΔQ<em>s/Q</em>sΔP/PE<em>s = \frac{\% \Delta Q</em>s}{\% \Delta P} = \frac{\Delta Q<em>s / Q</em>s}{\Delta P / P}

Degrees of Elasticity of Supply

  • Perfectly Inelastic Supply: Es = 0; quantity supplied does not change with price; supply curve vertical.
  • Perfectly Elastic Supply: Es → ∞; quantity supplied can expand/shrink to any extent at a given price; supply curve horizontal.
  • Unit Elastic Supply: Es = 1; percentage change in quantity supplied equals percentage change in price; supply curve through the origin.
  • More than Unit Elastic (Elastic): Es > 1; quantity supplied is highly responsive to price changes.
  • Inelastic Supply: Es < 1; quantity supplied is not very responsive to price changes.

Determinants of Price Elasticity of Supply

  • Availability of existing resources: easier access → more elastic.
  • Time period for production: longer time → more elastic (firms adjust inputs).
  • Flexibility of the production process: more flexible processes → more elastic.
  • Storage possibilities: storability increases elasticity.
  • Mobility of factors of production: higher mobility → higher elasticity.
  • Length of the production process: shorter processes → more elastic; long, complex processes → less elastic.
  • Number of producers: more producers → higher elasticity.
  • General economic conditions: favorable policies can increase elasticity.
  • Technological improvements: enhance efficiency → higher elasticity.

Measurement and Examples (PES)

  • PES measures responsiveness of quantity supplied to price changes; use the formula above to compute.
  • Note: Higher PES means supply is more responsive to price changes; lower PES means less responsiveness.