Supply

Definition Supply is the quantity of a good or service that a producer is able and willing to supply onto the market at a given price in a given period of time. Normally, when demand rises supply will shift outwards in order to meet the demand and thus there is an extension of supply.

The law of supply states this, saying that higher quantity will be supplied at higher prices, all other factors stays the same.

3 main factors There is a positive relationship between the market price and the quantity supplied. This is due to three main factors, one of them being that it becomes more profitable for businesses to increase their output when the price of a good increases.

The second factor is that higher prices send signals to firms that there is a potential to increase production. With increased production comes increased production costs and thus a higher price is needed to cover the extra costs associated with the increased production.

The third factor is that when prices goes up it becomes more profitable for other firms to enter the market, which in turn leads to an increase in supply. This is why there is a higher quantity supplied at a higher price level.

The supply curve can shift position The supply curve can shift position. If the supply curve shifts to the right (from S1 to S2) this is an increase in supply; more is provided for sale at each price. If the supply curve moves inwards from S1 to S3, there is a decrease in supply meaning that less will be supplied at each price.

Determinates and conditions of supply

Cost of production A fall in the cost of production leads to an increase in the supply of a good because the supply curve shifts downwards and to the right. Lower costs mean that a business can supply more at each price. If production costs increase, a business will not be able to supply as much as at the same price - this will cause an inward shift of the supply curve.

Changes in production technology Technology can change very quickly and in industries where the pace of technological change is rapid we expect to see increases in supply -- and therefore lower prices for the consumer.

Climatic conditions For agricultural commodities such as coffee, tea, fruit, and wheat the climate can exert a great influence on supply. Favorable weather conditions will produce a bumper harvest and will increase supply. Unfavorable weather such as drought will lead to a poor harvest and decrease supply. These unpredictable changes in climate can have dramatic effect on market prices for many agricultural goods.

Change in the price of a substitute producer good. A substitute in production is a product that could have been produced using the same resources. Take the example of barley; an increase in the price of wheat makes wheat growing more attractive. This may cause farmers to use land to grow more wheat and less barley, causing the supply of barley to then shift to the left.

Change in the price of a complementary producer good In some cases goods are supplied jointly. If a higher price leads to an increase in the quantity supplied of one good, it would also cause in increase in the quantity produced at each and every price level for the complementary good -- the supply curve will shift out.

The number of producers in the market The number of sellers in a market will affect the total market supply. When new firms enter a market, supply increases and causes a downward pressure on the market price. Sometimes producers may decide to deliberately limit supply by controlling production through the use of quotas. This is designed to reduce market supply and force the price upwards.

The entry of new firms into a market causes an increase in market supply and normally leads to a fall in the market price paid by consumers. More firms increases market supply and expands the range of choice available.

Movement along a supply curve Movements along one supply curve follow the same idea as movements along a single demand curve: nothing is changing except for the price of the good, so the only thing influencing supply is a change in price.

Government taxes and subsidies Government intervention in a market can have a major effect on supply. A tax on producers causes an increase in costs and will cause the supply curve to shift upwards. Less will be supplied after the tax is introduced.

A subsidy -- Payment made by the government to producers of goods and services -- has the opposite effect from a tax rise. A subsidy will increase supply because a guaranteed payment from the Government reduces a firm's costs, allowing them to produce more output at a given price. The supply curve shifts downwards and to the right depending on the size of the subsidy.

Taxes

Subsidies

Sources http://www.investopedia.com/university/economics/economics3.asp