What is Supply?
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Andy Rees defines Supply as the quantity of the good or service that producers are willing to supply to the market at a given price over a given period of time.
There is a positive relationship between the price and the quantity supplied by the producers. The assumption here is that the producer has a profit motive. Thus he would like to sell more when the price is higher. This is why the supply curve is a upward sloping curve.
There is a positive relationship between the price and the quantity supplied by the producers. The assumption here is that the producer has a profit motive. Thus he would like to sell more when the price is higher. This is why the supply curve is a upward sloping curve.
A Supply curve is generally drawn with the help of a Supply Schedule.
Supply schedule is a table in which price and the quantity of good supplied at that price. For example, we have created a supply schedule and a corresponding supply curve for a fictitious Good X.
Supply curve can also be written as a formula.
Qs = c +d*P
Where Qs is the quantity supplied
c is he intercept of the supply curve, i.e the amount that will be supplied if the price is 0
d is the slope of the curve, i.e change in quantity supplied when the price changes.
Supply schedule is a table in which price and the quantity of good supplied at that price. For example, we have created a supply schedule and a corresponding supply curve for a fictitious Good X.
Supply curve can also be written as a formula.
Qs = c +d*P
Where Qs is the quantity supplied
c is he intercept of the supply curve, i.e the amount that will be supplied if the price is 0
d is the slope of the curve, i.e change in quantity supplied when the price changes.
Factors affecting Supply
There are many factors which affect supply. The supply function can be written as
In this function
- Qsx = Quantity supplied per unit of time for good X.
- P = the price of the good. As mentioned above, the producer has a profit motive, thus there is a positive relationship between the price and the supply curve. Changes in Price will cause movements in the supply curve namely the extension and the contraction of the supply. Extension in the supply is when the supply increases due to the increase in price while Contraction in the reduction in quantity supplied when the price reduces.
- Ps/c = Price of substitute and complementary goods. Increase in price of substitute goods will increase the supply of for good X as the demand for good X will increase, while decrease in price of the substitute will decrease the supply of good X as the Demand for good X will fall down.
- C = Cost of factor inputs. There is an indirect relationship between cost of inputs and supply. The producer will tend to reduce supply as there will be less profits.
- T = Technology. Any improvement in technology will reduce cost. Thus if there is an improvement in the technology, the supply will be increased as the producer will want to maximise the profits
- E = Business expectations. Business might produce more anticipating an increase in Demand. For example, Chocolate companies tend to stock up during the holidays especially Valentines day.
- N = number of suppliers. In case of a market supply curve introduction of new suppliers will increase the supply and the market supply curve will move towards the right. If suppliers leave the market, the market supply curve will move towards the left. This is possible only when the good is a homogeneous good.