Supply and Factors Affecting Supply

Supply

If we view the market as an equation, Supply is the other side contrasting the Demand. In fact, Supply refers to the willingness and ability of producers to offer goods and services for sale. There is a wide range of producers from manufacturers, retailers, and utility companies to babysitters.

The two keywords here are willingness and ability. Take farmers as an example, if the price of the vegetables at the market is too low, the farmers may not be willing to grow and transport their produce. Otherwise, when the weather is bad, the farmer’s crops of fruits and vegetables are ruined, so they cannot supply any produce to the market. 

Law of supply

As is true with demand, price is the number one factor affecting supply. Hence, the law of supply states that when prices decrease, quantity supplied decreases, and when prices increase, quantity supplied increases.  

Supply curve

The supply curve illustrates the correlation between the cost of a product or service and the quantity of it that is available.

The supply curve is shown in a graph with the price on the left vertical axis and the quantity supplied on the horizontal axis. The curve will move upward from left to right, illustrating the law of supply: As the price of a given commodity increases, the quantity supplied will increase (all else being equal).

Cost of productions

Costs of production refer to all the expenses a business incurred during the process of creating and delivering products or services.  These expenses can range from raw materials, rent, and equipment to marketing costs, labourers and many more.

The types of production costs are categorised as follows:

• Fixed cost

• Variable cost

• Total cost

• Average cost

• Marginal cost

Fixed costs

Expenses that the owners of a business must incur whether they produce nothing, a little, or a lot (e.g. rent, Labour costs, loan interest payment).

Variable costs

Business costs that vary as the level of production output changes (e.g. raw materials, machine & equipment).

Total costs

The aggregate costs incurred by a company in producing a given level of output.

Total Costs (TC) = Fixed Costs (FC) + Variable Costs (VC)

Average cost

(Also known as unit cost) is the firm’s total costs divided by the quantity of output it produces.

Average Cost (AC) = Total Costs (TC) / Level of Output (Q)

Marginal cost

The change in total production cost that comes from making or producing one additional unit.

Marginal Cost (MC) = Change in Total Costs (additional TC) / Change in level of output (additional Q)

Elasticity of Supply

The elasticity of supply is the responsiveness of a supply of a good or service after a change in its market price.

In economics, a supply is inelastic when the quantity supplied is not sensitive to price changes (e.g. casual clothes, nutritious food, and essentials are inexpensive and uncomplicated products to make, so their supplies are inelastic). In contrast, the supply of expensive and complicated items such as luxury cars or non-necessary items is often elastic.

Factors that cause a change in supply

Six main factors cause a change in supply including:

• Costs of production

• Labor productivity

• Technology

• Government actions

• Producer expectations

• Number of producers

Costs of production

The collective price of the resources that go into producing a good or service will affect supply directly. For instance, lower wages and raw materials reduce input costs, which will lead to increased supply.

Labor productivity

Better-trained or more skilled workers are usually more productive. Increased productivity decreases costs and increases supply.  

Technology improvements

By applying scientific advances to the production process, producers have learned to generate their goods and services more efficiently. For example, the use of computers and automation will help reduce the firm costs and increase the supplied amount.

Government actions

Government actions such as taxes or subsidies, can have a positive or a negative effect on production costs.

Producer expectations

The amount of product that producers are willing and able to supply may be influenced by whether they believe prices will go up or down.

Number of producers

A successful new product or service always brings out competitors who initially raise the overall supply.

References

Corporate Financial Institute n.d, Law of Supply, Corporate Financial Institute, available at <https://corporatefinanceinstitute.com/resources/economics/law-of-supply-economics/>.

Econ Port n.d., Factors Affecting Supply, Econ Port, available at <https://www.econport.org/content/handbook/supply/changeSupply.html>.

Will, K 2024, Supply Curve: Definition, How It Works, and Example, Investopedia, available at <https://www.investopedia.com/terms/s/supply-curve.asp>.

Tejvan, P 2019, Factors affecting Supply, Economic Help, available at <https://www.economicshelp.org/microessays/equilibrium/supply/>.