Supply Introduction

Supply is the quantity of goods a firm offers to sell in the market at a given price. Now the theory of supply states that with an increase in price the number of goods a firm wishes to supply will also increase.

 Supply refers to the amount of a good or service that the producers/providers are willing and able to offer to the market at various prices during a period of time. There are two important aspects of supply:

• Supply refers to what is offered for sale and not what is finally sold.
• Supply is a flow. Hence, it is a certain quantity per day or week or month, etc.

In economics, supply is the amount of a resource that firms, producers, labourers, providers of financial assets, or other economic agents are willing and able to provide to the marketplace or directly to another agent in the marketplace. Supply can be in currency, time, raw materials, or any other scarce or valuable object that can be provided to another agent. This is often fairly abstract. For example in the case of time, supply is not transferred to one agent from another, but one agent may offer some other resource in exchange for the first spending time doing something. Supply is often plotted graphically as a supply curve, with the quantity provided (the dependent variable) plotted horizontally and the price (the independent variable) plotted vertically.

In the goods market, supply is the amount of a product per unit of time that producers are willing to sell at various given prices when all other factors are held constant. In the labor market, the supply of labor is the amount of time per week, month, or year that individuals are willing to spend working, as a function of the wage rate.

In financial markets, the money supply is the amount of highly liquid assets available in the money market, which is either determined or influenced by a country's monetary authority. This can vary based on which type of money supply one is discussing. M1 for example is commonly used to refer to narrow money, coins, cash, and other money equivalents that can be converted to currency nearly instantly. M2 by contrast includes all of M1 but also includes short-term deposits and certain types of market funds.

Determinants of Supply

While the price is an important aspect for determining the willingness and desire to part with goods/services, many other factors determine the supply of a product or service as discussed below:

Price of the Good/ Service

The most obvious one of the determinants of supply is the price of the product/service. With all other parameters being equal, the supply of a product increases if its relative price is higher. The reason is simple. A firm provides goods or services to earn profits and if the prices rise, the profit rises too.

Price of Related Goods

Let’s say that the price of wheat rises. Hence, it becomes more profitable for firms to supply wheat as compared to corn or soya bean. Hence, the supply of wheat will rise, whereas the supply of corn and soya bean will experience a fall.

Hence, we can say that if the price of related goods rises, then the firm increases the supply of the goods having a higher price. This leads to a drop in the supply of the goods having a lower price.

Price of the Factors of Production

Production of a good involves many costs. If there is a rise in the price of a particular factor of production, then the cost of making goods that use a great deal of that factors experiences a huge increase. The cost of production of goods that use relatively smaller amounts of the said factor increases marginally.

For example, a rise in the cost of land will have a large effect on the cost of producing wheat and a small effect on the cost of producing automobiles.

Therefore, the change in the price of one factor of production causes changes in the relative profitability of different lines of production. This causes producers to shift from one line to another, leading to a change in the supply of goods.

State of Technology

Technological innovations and inventions tend to make it possible to produce better quality and/or quantity of goods using the same resources. Therefore, the state of technology can increase or decrease the supply of certain goods.

Government Policy

Commodity taxes like excise duty, import duties, GST, etc. have a huge impact on the cost of production. These taxes can raise overall costs. Hence, the supply of goods that are impacted by these taxes increases only when the price increases. On the other hand, subsidies reduce the cost of production and usually lead to an increase in supply.

Other Factors

There are many other factors affecting the supply of goods or services like the government’s industrial and foreign policies, the goals of the firm, infrastructural facilities, market structure, natural factors etc.