Supply

Supply is a schedule showing the relationship between what producers are willing to produce at each price during a specific period. Because producers must pay expenses to produce a product and because they expect to earn a profit, producers will increase the supply in proportion to the price at which they can sell.

The law of supply states that the supply increases as the price increases, and falls when prices fall. Because demand decreases when prices increase and vice versa, there is an inverse relationship between demand for the product and its supply.

A graph of the demand and supply curves, showing how they are inversely related.

The amount that sellers are willing to supply at each price is displayed in a supply schedule, which is a table showing the relation between the supply price and the quantity supplied, and a graph of this relationship is called the supply curve. The supply curve is often displayed as a straight line, but the reality is that capital and labor costs money, so, in the long run, suppliers will not produce a product or supply a service if the price is insufficient to pay for the inputs and to provide a profit. In the short run, suppliers may take a loss to better cover sunk or fixed costs, but suppliers will leave the market if there are no expectations of future profit. Nonetheless, because the minimal prices required for producing a profit will differ according to the product or service and to the knowledge of suppliers, the supply curve is depicted as a straight line. (That the line is straight is also a simplification of an economic concept, as is the demand curve.)

Market Supply

Because of differences in the efficiency that each producer can produce a product and because of differences in the desirability of producing a product, each producer will have their own supply schedule — the amount that they are willing to supply at each price. The aggregate or market supply schedule equals the sum of all individual supply schedules. Likewise, the sum of the supply curve of each supplier is equal to the market supply. Below is an example of the supply schedule of cantaloupes at each price between $1 and $5 by the only 2 farmers at a farmer's market.

Supply Schedule
Supply
Price
$5
$4
$3
$2
$1
Farmer
1
100
80
60
40
20
+
Farmer
2
120
96
72
48
24
=
Market
Supply
220
176
132
88
44
A price-quantity chart showing how individual supply curves add up to the market supply curve.

Supply Determinants

Aside from prices, other determinants of supply are resource prices, technology, taxes and subsidies, prices of other goods, price expectations, and the number of sellers in the market. Supply determinants other than price can cause shifts in the supply curve. Those that cause a decrease in the supply shifts the supply curve leftward, while increases in supply caused by non-price supply determinants shift the supply curve rightward.

A price-quantity diagram showing how non-price supply determinants shift the supply curve left or right.

Changes in price simply shifts the amount supplied along the supply curve. A higher price provides an incentive to increase the supply of a product. However, there may be diminishing returns in trying to increase the resources needed to produce a product in a short timeframe.

Increased prices usually increases profits, which is the main incentive for sellers to produce more. Therefore, the effect of the supply price depends also on resource (aka input) prices. If resource prices increase faster than supply prices, then producers will have less incentive to produce more. Likewise, when resource prices fall, then profits increase for the same price level, so sellers will produce more.

A similar analysis can be applied to taxes and subsidies, since taxes decrease and subsidies increase the profits of suppliers.

Improvements in technology can reduce the need for factors of production in supplying a product. For instance, robotics have greatly reduced the need for labor. More fuel-efficient aircraft allows airlines to sell seats for less, thereby increasing demand. Technology can also reduce distribution or marketing costs. For instance, the cost of distributing electronic books is virtually zero.

Prices of other goods will also affect the production of any one good. If a business can produce more than one type of product with its equipment and labor, then it will tend to produce more of those things for which it receives a higher price and less of the other things. For instance, a farmer can produce a large number of products on a farm. Hence, the farmer will allocate increased acreage for products yielding the highest profits. Since the farmer has only so many acres of land, devoting more land to grow one type of food will leave less land to grow other types. Such a substitution production will reduce the supply of the other items that the farmer can provide. And what is true for one farmer is probably true for all of them. Hence the market supply of more profitable crops will be greater until the increased supply reduces the market price enough to eliminate the excessive profit.

The number of sellers will have an effect on the market supply, since the market supply is simply the sum of the supply of each individual seller — more sellers entering the market increases supplies while departing sellers decreases supply.

Expected prices can also change the present supply, because if suppliers believe that prices will decline in the near future, they may try to sell all that they have presently. Likewise, if prices are expected to rise in the future, then suppliers may hold onto their supply until prices rise. After all, this is why people hold stock in companies, because they expect stock prices to rise. When they believe that the stock has reached the maximum price, then the expectation is that the prices thenceforth will decline, so they sell their stock to lock in their profit.