Supply: the Quantities of a Good Or Service That Producers Plan to Sell at Each Possible

Supply

Supply: the quantities of a good or service that producers plan to sell at each possible price during a certain period.

As in the case of demand, supply refers to planned quantities – the quantities that producers or sellers plan to sell at each price. Just as consumers must be able to carry out their plans, producers must be willing and able to supply the quantities concerned.

There is also no guarantee that the quantity supplied will actually be sold. The quantity actually sold or exchanged will depend, among other things, on the demand for the good or service in question. The quantity supplied during a specific period may therefore be greater than, equal to or smaller than the quantity actually sold or exchanged.

Like demand, supply is a flow concept that is measured over a period of time (hour, day, week, month, etc). It can also be expressed in words, schedules (numbers), curves (graphs) or equations (symbols).

In microeconomics, we focus on the supply of a particulargood. The total (or aggregate) supply of all goods and services in the economy is a macroeconomic issue.

Market supply

Market supply: the combined result of the decisions of all the individual suppliers of the product in question.

To illustrate the determinants and properties of supply, we consider the supply of tomatoes by farmers in a fresh produce market.

What determines the supply of tomatoes in a particular year?

The price of tomatoes: the higher the price of tomatoes, the greater the quantity that farmers will plan to grow and sell, ceteris paribus.

The prices of alternative products: farmers’ decisions about how many tomatoes to produce will also depend on the prices of alternative products (out-puts). If the price of cauliflowers increases, relative to the price of tomatoes, they might plan to produce more cauliflowers and fewer tomatoes. Likewise, if the price ofcabbages falls, relative to the price of tomatoes, they might plan to producefewer cabbages and more tomatoes. Theseoutputs are sometimes referred to as substitutes in production.

Prices of factors of production and other inputs: The quantities of tomatoesthat farmers plan to sell at different prices will also depend on the costs ofproduction. To make a profit, they have to cover their costs of production. If theprices of one or more of their inputs (eg labour, fertiliser, machinery) increase,a smaller quantity of tomatoes will be supplied at each price than before, ceterisparibus. The reason, of course, is that it will cost more to produce each quantity.

Expected future prices:Producers often have to plan long in advance. Farmers will therefore beinfluenced by what theyexpect to happen in future when their tomatoes reach the market. For example,the higher they expect the future price of tomatoes to be, ceteris paribus, themore tomatoes they will plan to produce. In the case of non-perishable crops,like wheat or maize, farmers may even withhold some of their produce from themarket in anticipation of a price increase. In other words, they may postponetheir supply to a future period.

The state of technology:new technologies (or production techniques) thatenable producers to produce at lower costs will increase the quantity suppliedat each price. For example, the introduction of new fertilisers or a new tomatowhich is less susceptible to plant disease will tend to increase the supply oftomatoes, ceteris paribus.

Government policy:Subsidies on particular goods or services tend to raise theirsupply, while taxes tend to reduce supply.

Natural disasters:floods, earthquakes and droughts have an impact on supply. In2011, for example, a major earthquake and tsunami in Japan destroyed many factoriesand reduced the supply of a number of goods (including motor vehicle parts).

Joint products and by-products:Some products are produced jointly (eg sugarand molasses, wheat and bran, beef and leather) with the result that achange in the supply of the major product results in a similar change in the supply ofthe by-product. Joint products are sometimes called complements in production.

So, in deciding what quantities of tomatoes to supply, farmers consider the price of tomatoes. This price is affected by the demand for tomatoes, but they do not worry about how the price is determined. They want to make a profit by selling tomatoes at prices that more than cover the costs of their inputs. They have no guarantee, however, that they will be able to sell all the tomatoes they plan to produce at each price. For example, when the market price is lower than the price they expected, they may have to sell some tomatoes at a loss, or even destroy them.

Supply can also be expressed in a shorthand way by using symbols.

Let Qs = quantity of tomatoes supplied

Px = price of tomatoes

Pg = prices of alternative outputs

Pf = prices of factors of production and other inputs

Pe = expected future prices of tomatoes

Ty = technology

N = number of firms supplying the product

… = allowance for other possible influences on the quantity supplied

The supply of tomatoes can then be expressed as

Qs = f(Px, Pg, Pf, Pe, Ty, N, …)

As in the case of demand, we focus primarily on the relationship between the quantity supplied and the price of the good. We therefore state that…

Qs = f(Px) ceteris paribus

We can also construct a supply schedule. The table on the next pageis an example of such a schedule. It shows the various quantities of tomatoes which farmers will supply at various prices during a particular week. In contrast to the quantity demanded, the quantity supplied increases as the price of the product increases.

The information in the supply schedule can be illustrated graphically by drawing a supply curve. Once again we accord priority status to price above all other determinants of the quantity supplied by indicating it on the vertical axis.

The supply curve has a positive slope, indicating that the quantity supplied increases as the price increases. The points on the supply curve correspond to the different possibilities indicated in the table. The fact that we join the points to draw a supply curveimplies that there are also other, intermediate possibilities (eg a price of R1,50 per kg and a quantity supplied of 750 kg).

Supply curves are not necessarily linear, but to keep things simple we assume (for the moment) that all supply curves can be represented by straight lines.

Movements along the supply curve and shifts of the curve

The supply curve below shows the relationship between the price of the product and the quantity supplied, ceteris paribus.

At a price of P1the quantity supplied is Q1, as indicated by combination a in the figure.
If the price increases to P2, the quantity supplied will increase to Q2, as indicated by combination b in the figure.
The supply curve shows that the quantity supplied will increase if the price increases, ceteris paribus.
If we want to know what will happen if the price ofthe product changes, we simply move along the curve.

However, if one of the other determinants of the quantity supplied changes, this is indicated by a shift of the supply curve. Whereas a movement along a supply curve (as a result of a change in the price of the product, which we measure on the vertical axis) is referred to as a change in the quantity supplied, a shift of the supply curve (as a result of a change in any factor other than the price of the product) is called a change in supply. The two possible changes in supply are indicated in the figure below.

Any factor which leads to an increase in supply (ie an increase in the quantity supplied at each price of the product) will cause an outwards shift in the supply curve(SS to S2S2).
Any factor which results in a decrease in supply (iea fall in the quantity supplied at each price of the product) will cause an inwards shift in the supply curve (SS to S1S1).