[1.1.3b] Supply
Supply
Supply is defined as the quantity of a good or service that producers are willing and able to offer for sale at a given price over a given time period. Just as demand requires both willingness and ability to buy, supply requires both willingness and ability to sell — a firm that cannot cover its costs will not produce. Like demand, supply is a flow and must be expressed per unit of time.
The Supply Curve
The supply curve slopes upward from left to right, reflecting the law of supply: as price rises, the quantity supplied increases. Higher prices make production more profitable, encouraging existing firms to produce more and attracting new firms into the market.
Movement Along vs Shift of the Supply Curve
A change in the price of the good itself causes a movement along the supply curve. A change in any other factor shifts the entire curve. A rightward shift = supply increases (more offered at every price); a leftward shift = supply decreases.
Factors That Shift the Supply Curve
A rise in costs of production (wages, raw materials, energy) reduces profitability at every price. Firms reduce output or exit, shifting supply left. Falling costs shift supply right.
Improvements in technology allow more output from the same inputs, reducing unit costs. Production becomes more profitable, shifting supply right. Mechanisation of agriculture, for example, dramatically increased food supply across the twentieth century.
An indirect tax (e.g. VAT or excise duty) raises firms' costs, effectively reducing profitability at every price. Supply shifts left — producers require a higher price to supply the same quantity as before.
A subsidy is a government payment to producers that reduces their costs. Lower costs encourage greater output, shifting supply right. Agricultural subsidies serve precisely this purpose in many countries.
Natural factors such as weather and disasters can dramatically affect supply — especially for primary products. A drought shifts supply left; an excellent growing season shifts it right.
Key Takeaways
- Supply is the quantity producers are willing and able to offer for sale at a given price over a given time period.
- The supply curve slopes upward: higher prices make production more profitable, so more is supplied.
- A change in the price of the good causes a movement along the supply curve.
- Changes in costs, technology, taxes, subsidies or natural factors shift the supply curve.
- A rightward shift = increase in supply; a leftward shift = decrease in supply.