Supply is the amount of a good that producers are willing and able to offer for sale at a given price over a particular time period.
A supply schedule is a tabular representation of the relationship between price and quantity supplied. The amount of the good supplied increases as price increases and decreases as price decreases. This is because high price assures of high profit which induces the producer to supply more. Low price, which gives low profit, discourages the supplier from offering more units for sale.
Table 1: Supply schedule for cocoa
|Price per bag ($)||Quantity (in bags)|
This is a graphical representation of the relationship between price and quantity supplied. A supply curve is a diagrammatic expression of the supply schedule.
Figure 1: A supply curve
Individual supply versus market supply
The demand of only one manufacturer of a product is known as individual supply while the total supply of all the manufacturers of a product is the market supply. The market supply is obtained by summing up the supply of all the producers of a product.
The Law of Supply
The law of supply says “the amount of a product that producers are willing to provide increases as the price increases while it decreases as the price decreases”. In other words, the relationship between price and quantity supplied is direct or positive. If two variables are directly or positively related, they move in the same direction.
Changes in the supply curve
Movement along the supply curve
This kind of movement occurs when it is the price of the commodity itself that increases or decreases. Economists also refer to this as a change in the quantity supplied. If the price of a product increases there is an increase in the quantity supplied (see Figure 2 below) while it is known as a decrease in the quantity supplied when a good’s own price falls (see Figure 3 below).
Figure 2: Increase in quantity supplied
Figure 3: Decrease in quantity supplied
Shift of the supply curve
A shift is a leftward or rightward movement of the supply curve. This shows either an increase in supply (rightward movement) or a decrease in supply (leftward movement). The factors responsible for a shift include production costs, taxes, subsidy, technology, weather, natural disaster and war.
A rise in production costs, such as labour costs and raw material cost, reduce the units of a good that can be produced and supplied which is shown by a shift of the supply curve from S1 to S2 (Figure 4 below) while a fall in production costs lead to a rightward shift from S1 to S2 (Figure 5 below). Labour costs can increase if a trade union negotiates higher wages or the government raises the pension rate to be paid by employers, thereby reducing production and supply.
Figure 4: A decrease in supply
Figure 5: An increase in supply
Indirect taxes, which are taxes on goods and services, can add to the costs incurred by the producer, e.g. Value Added Tax (VAT). The amount of the good produced and offered for sale in the market can reduce if indirect taxes are increased by the government. The reverse is the case when indirect taxes are reduced.
Another condition that makes supply to change is the grant given to producers by the government in order to encourage more production and make the good affordable for the consumers. The grant is known as a subsidy. A rise in subsidy helps to cover part of the production cost and increase supply while a cut in subsidy reduces the supply of a good.
Technological advancement makes machines more productive; it is capable of shifting the supply curve from S1 to S2 (Figure 5 above). A bad weather condition can reduce crop yield and supply of farm produce. This will cause the supply curve to decrease as shown in Figure 4 above. Likewise, natural disasters and war would lead to a fall in production and supply because production facilities would be destroyed.
Types of supply
Composite supply is the supply of a product that can be used for more than one purpose. Palm oil, for example, has a composite supply because it can be used for cooking and the production of other products like soap, cosmetics, etc. If more of it is supplied for a purpose, less is available for other purposes. The supply of two or more goods from the same source, e.g. hides and beef from cattle, is joint supply while competitive supply is the supply of substitute goods.a