Supply

Supply

  • Supply is the amount of a product businesses offer at a given price.
  • Higher prices generally lead to a greater supply.

Price and Supply

  • Change in Price: Affects the quantity supplied.
    • Increase in Price (P1 → P2): Causes an extension in supply which is a movement along the supply curve.
    • Decrease in Price (P1 → P2): Causes a contraction in supply which is a movement along the supply curve.

Factors Affecting Supply (Other Than Price)

  • Changes in production costs (wages, raw materials, energy, etc.)
  • New technology (increased efficiency, falling costs)
  • Indirect taxes (taxes on spending)
  • Government subsidies
  • External shocks (world events, weather, policy changes)

Changes in Cost of Production

  • Increased costs reduce the incentive to supply due to lower profit margins.
  • This results in a decrease in supply represented by an inward shift of the supply curve.

Introduction of New Technology

  • New technology can lower costs per unit, increasing potential profit.
  • This incentivizes businesses to supply more, increasing supply, represented by an outward shift of the supply curve.

Changes in Indirect Taxes

  • Indirect taxes (e.g., VAT, excise duties) increase production costs.
  • This reduces the incentive to supply, leading to a decrease in supply, shown by an inward shift of the supply curve.

External Shocks: World Events

  • Events like wars or pandemics can disrupt supply chains and reduce supply.
  • This results in a decrease in supply, represented by an inward shift of the supply curve.

External Shocks: Weather

  • Adverse weather conditions can damage harvests, decreasing supply.
  • This leads to a decrease in supply, shown by an inward shift of the supply curve.

External Shocks: Government Policies

  • Government policies (e.g., breaking up monopolies) can increase market competition and supply.
  • This results in an increase in supply, represented by an outward shift of the supply curve.

Fixed Supply

  • In some scenarios, supply is fixed (e.g., a sporting event with a fixed number of seats).
  • The supply curve is vertical, indicating that the quantity supplied does not change regardless of price.