Supply is defined as the specific product available to the market for consumption. Demand is the amount of a specific product a consumer can purchase at each price. The supply and demand are deeply correlated. These two concepts of supply and demand are tangled to create market equilibrium which defines the availability of goods in the market and the prices they are sold for.
Law of supply: The law of supply describes that when the price of a product increases supply also increases and vice versa. However, if there is an oversupply, the price of that product will decrease. If there is an under-supply, the price of that product will increase. This basic principle of the law of supply helps the producers/suppliers to ensure that a certain number of their products is made available to the market at different price levels to meet the needs of consumer demand to increase the profit margin of a business.
Supply schedule/supply curve: The supply schedule shows the quantity of goods suppliers are willing to sell at each market price. The supply schedule shows the relationship between the price and quantity of goods supplied in a table format. Sometimes the supply curve is called a supply schedule because it is a graphical representation of the supply schedule.
Forces behind the Supply Curve shifts in Supply:
A supply curve shows how quantity supplied will change as the price rises and falls, assuming ceteris paribus—no other economically relevant factors are changing. If other factors relevant to supply do change, then the entire supply curve will shift. A shift in supply means a change in the quantity supplied at every price. Factors that can shift the supply curve are based on numerous factors including changes in production or raw materials costs, technological progress, the level of competition, the number of producers, the number of sellers, and government taxes, regulations, or subsidies. If new taxes are introduced, they will likely force producers to reduce quantities of their products that they can supply, thus shifting their supply curve leftward. When supply shifts left and demand shifts right, the equilibrium price always rises. Subsidies, on the other hand, are likely to reduce production costs for producers thus shifting their supply curve rightward. Conversely, when supply shifts right and demand shifts left, the equilibrium price always falls.
Image: New equilibrium takes place when supply shifts from S1 to S2.
The supply curve is shifted from S1 to S2 due to the change in the supply. An increase in the change in supply leads to the supply curve being shifted to the right, while a decrease in the change in supply results in the supply curve shifting to the left.
The forces that may cause the supply curve to shift are:
- Changes in input prices.
- Innovations in technology.
- Changes in prices of related goods.
- Changes in the number of producers.
- Changes in producers’ expectations.
- Government regulations, taxes, and subsidies.
Conclusion:
Shifts in supply also include (1) prices of factors of production, (2) returns from alternative activities, (3) technology, (4) seller expectations, (5) natural events, and (6) the number of sellers. When these other variables change, the all-other-things-unchanged conditions behind the original supply curve no longer hold.
Supply and demand-related Posts:
Related Post:
