Supply (economics)
In economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

, supply is the amount of some product producers are willing and able to sell at a given price all other factors being held constant. Usually, supply is plotted as a supply curve showing the relationship of price to the amount of product businesses are willing to sell.

In economics the term supply has a special meaning. It can be defined in the following.

Supply schedule

A supply schedule is a table which shows how much one or more firms will be willing to supply at particular prices. The supply schedule shows the quantity of goods that a supplier would be willing and able to sell at specific prices under the existing circumstances. Some of the more important factors affecting supply are the goods own price, the price of related goods, production costs, technology and expectations of sellers.

Factors affecting supply

Innumerable factors and circumstances could affect a seller's willingness or ability to produce and sell a good. Some of the more common factors are:
Goods own price: The basic supply relationship is between the price of a good and the quantity supplied. Although there is no "Law of Supply", generally, the relationship is positive or direct meaning that an increase in price will induce and increase in the quantity supplied.

Price of related goods: For purposes of supply analysis related goods refer to goods from which inputs are derived to be used in the production of the primary good. For example, Spam is made from pork shoulders and ham. Both are derived from Pigs. Therefore pigs would be considered a related good to Spam. In this case the relationship would be negative or inverse. If the price of pigs goes up the supply of Spam would decrease (supply curve shifts up or in) because the cost of production would have increased. A related good may also be a good that can be produced with the firm's existing factors of production. For example, a firm produces leather belts. The firm's managers learn that leather pouches for smartphones are more profitable than belts. The firm might reduce its production of belts and begin production of cell phone pouches based on this information. Finally, a change in the price of a joint product will affect supply. For example beef products and leather are joint products. If a company runs both a beef processing operation and a tannery an increase in the price of steaks would mean that more cattle are processed which would increase the supply of leather.

Conditions of Production. The most significant factor here is the state of technology. If there is a technological advancement in one's good's production, the supply increases. Other variables may also affect production conditions. For instance, for agricultural goods, weather is crucial for it may affect the production outputs.

Expectations: Sellers expectations concerning future market condition can directly affect supply. If the seller believes that the demand for his product will sharply increase in the foreseeable future the firm owner may immediately increase production in anticipation of future price increases. The supply curve would shift out. Note that the outward shift of the supply curve may create the exact condition the seller anticipated, excess demand.

Price of inputs: Inputs include land, labor, energy and raw materials. If the price of inputs increases the supply curve will shift in as sellers are less willing or able to sell goods at existing prices. For example, if the price of electricity increased a seller may reduce his supply because of the increased costs of production. The seller is likely to raise the price the seller charges for each unit of output.

Number of suppliers - the market supply curve is the horizontal summation of the individual supply curves. As more firms enter the industry the market supply curve will shift out driving down prices.

Government policies and regulations:Government intervention can have a significant effect on supply. Government intervention can take many forms including environmental and health regulations, hour and wage laws, taxes, electrical and natural gas rates and zoning and land use regulations.

This list is not exhaustive. All facts and circumstances that are relevant to a seller's willingness or ability to produce and sell goods can affect supply. For example, if the forecast is for snow retail sellers will respond by increasing their stocks of snow sleds or skis or winter clothing or bread and milk.

Supply function and equation

The supply function is the mathematical expression of the relationship between supply and those factors that affect the willingness and ability of a supplier to offer goods for sale. For example, is a supply function where equals price of the good equals the price of related goods and equals the number of producers. The vertical bar means that the variables to the right are being held constant. The supply equation is the explicit mathematical expression of the functional relationship. For example, . is y-intercept it is the repository of all non-specified factors that affect supply for the product. is the price of the own good. The coefficient is positive following the general rule that price and quantity supplied are directly related. is the price of a related good. Typically the relationship is positive because the good is an input or a source of inputs.

Supply curve

The relationship of price and quantity supplied can be exhibited graphically as the supply curve. The curve is generally positively sloped. The curve depicts the relationship between two variables only; price and quantity supplied. All other factors affecting supply are held constant. However, these factors are part of the supply curve and are present in the intercept or constant term.

Movements versus shifts

Movements along the curve occur only if there is a change in quantity supplied caused by a change in the goods own price. A shift in the supply curve, referred to as a change in supply, occurs only if a non price determinant of supply changes. For example, if the price of an ingredient used to produce the good, a related good, were to increase, the supply curve would shift in.

Inverse Supply Equation

By convention economists graph the dependent variable on the y axis and the independent variable on the x axis. This means that the equation depicted is the inverse equation. The form of the inverse supply equation is . An example of an inverse supply equation would be .

Marginal costs and short-run supply curve

A firm's short-run firm supply curve is the marginal cost curve above the shutdown point (the SRMC above the minimum average variable costs). The portion of the SRMC below the shutdown point is not part of the supply curve because the firm is not producing any output. The firm's long run supply curve is that portion of the long run marginal cost curve above the minimum of the long run average cost curve.

Shape of the short-run supply curve

The Law of Diminishing Marginal Returns (LDMR) shapes the SRMC curve. The LDMR states that as production increases eventually a point (the point of diminishing marginal returns) will be reached after which additional units of output will be successively smaller. The mathematical relationship is where is the wage rate and . Beyond the point of diminishing marginal returns the marginal product of labor will continually decrease. As decreases with a constant wage rate will increase.

From firm to market supply curve

The market supply curve is the horizontal summation of firm supply curves.

The shape of the market supply curve

There is no law of supply that “requires” that the market supply curve have a positive slope; the curve may slope down or up or be horizontal or vertical.


Price elasticity of supply
Price elasticity of supply
Price elasticity of supply is a measure used in economics to show the responsiveness, or elasticity, of the quantity supplied of a good or service to a change in its price....

 measures the responsiveness of quantity supplied to changes in price, as the percentage change in quantity supplied induced by a one percent change in price. It is calculated for discrete changes as and for smooth changes of differentiable supply functions as . Since supply is usually increasing in price, the price elasticity of supply is usually positive. For example if the PES for a good is 0.67 a 1% rise in price will induce a two-thirds increase in quantity supplied.

Significant determinants include:

Reaction time: The PES coeffiecient will largely be determined by how quickly producers react to price changes by increasing (decreasing) production and delivering (cutting deliveries of) goods to the market.
Complexity of Production: Much depends on the complexity of the production process. Textile production is relatively simple. The labor is largely unskilled and production facilities are little more than buildings - no special structures are needed. Thus the PES for textiles is elastic. On the other hand, the PES for specific types of motor vehicles is relatively inelastic. Auto manufacture is a multi-stage process that requires specialized equipment, skilled labor, a large suppliers network and large R&D costs.
Time to respond: The more time a producer has to respond to price changes the more elastic the supply. For example, a cotton farmer cannot immediately respond to an increase in the price of soybeans.
Excess capacity: A producer who has unused capacity can quickly respond to price changes in his market assuming that variable factors are readily available.
Inventories: A producer who has a supply of goods or available storage capacity can quickly respond to price changes.

Other elasticities
Elasticity (economics)
In economics, elasticity is the measurement of how changing one economic variable affects others. For example:* "If I lower the price of my product, how much more will I sell?"* "If I raise the price, how much less will I sell?"...

 can be calculated for non-price determinants of supply. For example, the percentage change the amount of the good supplied caused by a one percent increase in the price of a related good is an input elasticity of supply if the related good is an input in the production process. An example would be the change in the supply for cookies caused by a one percent increase in the price of sugar.

Elasticity along linear supply curves

The slope of a linear supply curve is constant. The coefficient of elasticity is usually not. If the linear supply curve intersects the y-axis PES will be infinitely elastic at the point of intersection. The coefficient of elasticity decreases as one move "up" the curve. However, all points on the supply curve will have a coefficient of elasticity greater than one. If the linear supply curve intersects the x axis PES will equal zero at the point of intersection and will increase as one moves up the curve. However, all points on the curve will have a coefficient of elasticity less than 1. If the linear supply curve intersects the origin PES equals one at the point of origin and along the curve.

Market structure and the supply curve

There is no such thing as a monopoly supply curve. Perfect competition is the only market structure for which a supply function can be derived. A function is a rule which assigns to each value of a variable one and only one value of the function. In a perfectly competitive firm the price is given. A manager of a competitive firm can tell you precisely what quantity of goods will be supplied for any price by simply referring to the firm's marginal cost curve. To generate his supply function the seller could simply initially set price equal to zero and then incrementally increase the price at each price level he could calculate the quantity supplied using the supply equation Following this process the manager could trace out the complete supply function. A monopolist cannot replicate this process. A change in demand can result in the "changes in price with no changes in output, changes in output with no changes in price or both". There is simply not a one to one relationship between price and quantity supplied. There is no single function that relates price to quantity supplied.

Aggregate supply in macroeconomics

Quantity of Output Supplied = Natural Rate of Output + a ( Actual Price - Expected Price)

See also

  • Demand curve
    Demand curve
    In economics, the demand curve is the graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price. It is a graphic representation of a demand schedule...

  • Law of supply
    Law of supply
    In economics, the law of supply is the tendency of suppliers to offer more of a good at a higher price....

  • Profit maximization
    Profit maximization
    In economics, profit maximization is the process by which a firm determines the price and output level that returns the greatest profit. There are several approaches to this problem...

  • Supply and demand
    Supply and demand
    Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...

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