The Concept of Supply

A. Supply is defined as:

The behavior or suppliers in terms of the quantity of a commodity they are willing to sell when confronted with different prices for that commodity during some specified time period.

B. A Supply Schedule

A supply schedule is a table showing the quantity of any given product that producers are willing and able to offer for sale at each possible price during some specified time period. Table 1 is an example of a supply schedule. For each price there is a unique quantity supplied.

Table 1

An individual producer’s supply schedule for the

production of Banana during July

Price per piece Quantity supplied per week

.50 1000

.75 2000

1.00 3000

1.25 4000 1.50 5000

C. The Supply Curve

The data from the supply schedule may be plotted and a curve drawn to connect each point. This curve is called the supply curve. (see figure 1)

The price is placed on the vertical axis and the quantity supplied on the horizontal axis.

D. The Relationship between Price and Quantity Supplied

The supply curve shows that as the price of any commodity rises, the quantity that suppliers are willing and able to offer for sale increases, assuming that all other factors that determine supply remain the same. If the price of the commodity falls, a smaller quantity of the good will be supplied.

This is called a direct relationship: one-factor increases as another increase or one factor decreases as another decrease.

The reasons for this direct relationship are:

As the price rises:

- The number of producers may increase.

- Each individual producer may supply more.

As the price falls:

- The number of producers may decrease.

- Each individual producer will supply less

Consider the following example of what may happen when the price of a commodity rises.

Farmer 1: Hey Mike, the price of corn has gone up P10.00 a bushel. Looks like it’ll continue to increase, too.

Farmer 2: I know, Joe. I just heard it on the commodities report on the radio. I’m not going to plant wheat this spring when I can do better in corn.

Farmer 1: I wasn’t going to use all my acres for planting. But now I’m going to plant all 200 acres in corn.

Here the increased price of corn persuaded Mike to plant corn instead of wheat and Joe to use more of his land for planting corn. Now consider an example of what happens when prices fall….

Calculator Manufacturer ( Tom ) : Say Jim, do you see how calculator prices are declining? I can’t make it at manufacturing calculators anymore. My costs are just too high given the current prices.

Other Calculator Manufacturer ( Jim ) : I sympathize with you, Tom. I won’t have to go out of business yet, but I will have to trim costs and cut back production.

In this situation, Tom will stop manufacturing calculators and he will be out of the market. Jim will continue in the market, but he will supply less than he did before the price decline.

When the prices rise, increase in production occur; that is, suppliers are willing and able to supply more. To increase this production, existing facilities are used more intensively, overtime wages are paid, and equipment is frequently used more intensively. When prices fall, the opposite occurs.

E. Market Supply

If market supply were similar to market demand, you would expect it to be the sum of the individual supply schedules. But it is not exactly that for the following reason. Competition among producers will cause the price of resources or raw materials to rise. This rise would not be so abrupt if a producer were in the market alone. Therefore, because of these higher costs, producers together will not produce as much in total as they would with no competitors.

Consider the following situation which illustrates the competition for resources.

Boss: The price of tape recorders has gone up in the past two months. I would like to manufacture 30,000 more tape recorders this month. But now everybody in this business is increasing his production. They all have driven the price of plastic casing sky high. I can’t buy as many casings as I need at those prices, so I will only be able to manufacture 20,000 additional tape recorders.

Let us now consider the factors underlying supply. They are listed below.

F. The Factors Underlying Supply / Determinants of supply

Costs of production

Price of Goods

Availability of Resources

Technology

Number of Producers

Taxes

Weather

Subsidies

The first factor underlying supply is the cost of production. One of the important costs of production is the cost of labor. How much producers have to pay for help influences how much they can produce or cheaply they can sell their commodity or even where they will locate their plant. For example, in the last 30 years, manufacturers of sheets and pillow cases have moved from the North to the South, mainly because labor costs are lower in the South.

The cost of raw materials is very important. Raw materials are land, water, and any other ingredients that make up the commodity. If the cost of raw materials rises, the supply of the finished product will probably decrease.

The interest rate-the cost of financial capital is another cost of production. If the interest rate is high, producers will have to charge more for their product. If the interest rate is low, producers can charge a lower price for their product.

The second factor underlying supply is the price of goods. A related good may be a substitute or a complement for a product. Butter and margarine for example, are substitutes. If the price of the butter rises, consumers will purchase more margarine and less butter. The reverse would happen if the price of butter falls. In either case, the supply of both butter and margarine will be affected in opposite ways since they are substitute goods.

The third factor underlying supply is the availability of resources. The supply of goods in the market depends on the availability of resources. More economic resources that offers production means more supply of goods in the market.

The fourth factor underlying supply is the technology. Improvements in technology make possible the production of goods and services at lower costs. When these are adapted by firms, they will be able to produce more.

More players in the market create competition within, the producers consider stiff competition as challenge to capture the market. The fifth factor underlying supply is the number of producers or sellers in the market. For the past 10 years, Jollibee and Mc Donald is competing to capture the biggest share in the food chain industry, with this competition, other food companies such as Wendy’s, burger king and others help the industry to supply more and consumers will take advantage of promotions given by the said company to choose who among them sells cheaper value meal.

Payment for taxes is an added component of the cost of production. Therefore the sixth factor underlying supply is taxes. Higher taxes mean higher production cost, and firms are discouraged to produce more goods and services.

The seventh factor underlying supply is subsidies. Subsidies are given to firms by the government to help them maintain their current on desired output. The money received by the firms effectively reduces their cost of production, and they are encouraged to produce more goods and services.

The last factor underlying factor of supply is weather. Weather is considered determinants of supply in the third or agricultural country like the Philippines. Farmers are very much dependent on the country’s weather in order to produce more agricultural products.

G. A change in Supply

If Any of the factors that determine supply change, the quantity that will be supplied at each price changes.

If the supply curve shifts to the right, quantity that will be supplied at each price increases.

If the supply curve shifts to the left, the quantity that will be supplied at each price decreases.

(see figure 2)

H. A change in Supply and a Change in Quantity Supplied

A change in quantity supplied is represented by the movement from one point to another on a fixed supply curve. This movement shows the change in quantity supplied due to a change in the commodity’s price, other things remains constant.

Example:

In figure 3, the price of candy rises from 50 centavos a piece to one Peso a piece. Consequently, the producers or seller increases the amount produced from 1,000 pieces to 3,000 pieces.

Figure 3

Thus, a change in quantity supplied occurs because of a change in the price of the commodity itself.

A change in supply curve occurs when a factor underlying supply changes, thus causing a shift of the entire curve. Producers will be willing to supply a different quantity at each price.

Example:

The price of sugar and flavoring used for the producing candies has decreased. Therefore, at each price, the producers of banana cake will supply more. As shown if figure 4, the amount supplied at 50 centavos a piece will rise from 1,000 pieces to 3,000 pieces (shift from point x to point y) or the same quantity will be sold but a lower price.

Related Topics

Supply

The Concept of Supply