The Market Concept of Supply

Examining Supply Supply is defined as the quantities that sellers will offer for sale at various prices during a given point in time. Like consumers, suppliers react to price changes but in a completely opposite way: that is, as price rises, they want to supply more. Why do you think this is? Profit Sellers are in business to make profit. It their costs remain unchanged their profits will increase as the price of their product rises.

Changes take place of the supply side of the market as the number and variety of products available to purchase is constantly increasing. One example of this change is the influx of cell phones that can be found in the marketplace.

Often products disappear as quickly as they appear Often products disappear as quickly as they appear. The rise of the ball-point pen has nearly eliminated the use of fountain pens. Even large sized vehicles are far less common compared to the popularity of the compact vehicles.

Law of Supply and Demand The Law of Demand: The quantity demanded varies inversely with price, as long as other things do not change. The Law of Supply: The quantity supplied will increase if price increases and fall if price falls, as long as other things do not change.

reminder Much the same as demand, when we look at how supply changes in the marketplace we look at a change in one factor while all other remain constant. This is to simplify the process for the purpose of this class.

Factors that affect Supply Price – The higher the price a supplier can receive for a product the more of the product the supplier will offer to the market. This makes sense because suppliers want to make as much profit as possible. The opportunity cost of not providing as product is greater when the price is higher. Farmers look at this and will adjust their cattle numbers based on the price they can get for meat. If the price is high for pork farmers will increase their stock of pigs and when prices drop they will change their stock to a more profitable animal.

Production Cost – There are a variety of expenses involved in supplying products to the marketplace including cost of raw materials, transportation, rent, wages, salaries, machines and equipment, taxes… A change in any of these costs can influence the supply of a product. Higher wages for employees may force suppliers to increase the price for a product thus ensuring a healthy profit.

Technology Changes – Improvements in technology can also be a factor in supple changes. As new tech and innovations are introduced many supplies can improve supply. The introduction of machines that make vehicles has nearly eliminated the need for a human assembly line in production. Machines can work more efficiently and for longer hours which can influence the supply of a product to the market. Pesticides and irrigation methods have increase crop yields and have allowed farms to increase their supply of produce.

Government Regulation – All levels of government can influence the level of supply of certain products as they can enact regulation that limit the production of certain crops. These regulations can influence the supply of various products. Some jurisdictions may choose to ban certain businesses or products, therefore the supply of these items are impacted.

Psychology of Owner – The individual owners goals and motivations may affect the supply of certain products. Ultimately, it is a decision that they can make, despite the assumption that owners want to make as much profit as possible.

Weather Conditions – Especially when you consider the agricultural industry in particular, weather conditions can potentially have a huge impact on supply of many products. The global tea industry is worth upwards of $40 billion. If tea producing countries are hit with droughts or excess rain the supply of tea can be impacted.

Supplier Response to price change When the price of a product is higher the quantity supplied to the market increases. Suppliers want to get a much product into the market but at some point the cost of increasing the supply goes up. Since costs increase a higher price must be obtained in order for the supply to be increased. The increase in costs for increasing a supply can include increasing storage, refrigeration capacity, restaurant seating space, increased transportation costs, suppliers time…

Supply Schedule and Curve Unlike with demand, supply has a positive relationship between the price and quantity supplied. With all other factors at a constant, an increase in the price for a product will lead to an increase in quantity supplied.

An increase in the price of sandwiches leads to an increase in the quantity of sandwiches supplied, this is shown as a movement along the supply curve.

Change in Supply An increase in weekly rent paid by store owners leads to a change in the entire supply schedule for sandwiches. The store owners will now charge a higher price per sandwich.

When any of the constant factors affecting supply change this will lead to a change in the supply schedule and consequently a shift of the supply curve. In this situation the suppliers are only willing to supply sandwiches at a high price

With an increase in costs to a supplier they are now faced with a decrease in supply. In contract, any change that will lower cost will move the supply curve to the right and will result in an increase in supply. Any constant factor that changes will result in a change in supply. Only the price of the product will affect quantity supplied.

A change in quantity supplied occurs when the price of the product changes, this is shown by a movement along the existing supply curve.

Questions for Review Take a moment to answer question 2.3 on page 55 Read the case study Are Gasoline Prices Too Low on page 57 and answer questions 1-4