Supply: What Producers Bring to Market
The Law of Supply and the Supply Curve
The law of supply is a fundamental principle. It says: All else being equal, if the price of a good rises, producers will supply more of it. If the price falls, they will supply less. This makes intuitive sense. If you could sell your homemade lemonade for $10 a cup, you'd be eager to make a lot! But if you could only charge $0.10, you might not bother making any.
We can plot this relationship on a graph to create a supply curve. The vertical (Y) axis shows the price. The horizontal (X) axis shows the quantity supplied. Typically, the supply curve slopes upward from left to right.
What Shifts the Entire Supply Curve?
A change in the price of the good itself causes a movement along the supply curve. But other factors can change a producer's willingness or ability to sell at every single price, causing the entire supply curve to shift. These are called determinants of supply.
An increase in supply means producers are willing to sell a larger quantity at every price. On a graph, the curve shifts to the right. A decrease in supply means producers are willing to sell a smaller quantity at every price. The curve shifts to the left.
| Determinant | What Happens? | Example |
|---|---|---|
| Cost of Inputs1 (e.g., raw materials, labor) | Input costs fall → Supply increases. Input costs rise → Supply decreases. | A drop in the price of flour increases the supply of bread. |
| Technology | Better technology → Supply increases. | A faster oven allows a bakery to produce more bread per hour. |
| Number of Sellers | More sellers enter the market → Supply increases. Sellers leave → Supply decreases. | Three new bakeries open in town, increasing the total supply of pastries. |
| Producer Expectations | Expect higher future prices → May decrease supply now (to sell later). | A wheat farmer stores grain expecting its price to rise next month. |
| Government Policies (Taxes & Subsidies) | A tax increases costs → Supply decreases. A subsidy2 lowers costs → Supply increases. | A government subsidy for solar panels increases their supply. |
Supply in Action: The Story of Smartphone Cases
Let's follow a concrete example. Imagine a company, "CaseCraft," that makes protective cases for a popular smartphone.
Movement Along the Curve: The new phone launches at a high price, and many people buy it. CaseCraft sells its basic case for $20 and makes 1,000 per week. Seeing high demand, they raise the price to $25. Following the law of supply, they now produce 1,500 cases weekly to earn more profit. This is a movement up along their supply curve.
Shift of the Curve: Six months later, two key things happen. First, a new molding machine (better technology) allows CaseCraft to make cases twice as fast. Second, three competing companies (number of sellers) start making similar cases. These are determinants of supply! At every possible price, the total quantity of cases available in the market is now higher. The entire market supply curve for smartphone cases has shifted to the right.
Elasticity of Supply: How Responsive Are Producers?
Not all supplies react to price changes in the same way. Elasticity of supply measures how responsive the quantity supplied is to a change in price.
If a small price increase causes a large increase in quantity supplied, supply is elastic. This often happens when production can be increased quickly and cheaply (e.g., manufacturing T-shirts).
If quantity supplied changes very little even with a big price change, supply is inelastic. This is typical for goods that take a long time or are very difficult to produce more of (e.g., original paintings, rare minerals, agricultural products in the short term).
If $PES > 1$, supply is elastic. If $PES < 1$, supply is inelastic. If $PES = 1$, it is unit elastic.
Important Questions
What is the difference between "supply" and "quantity supplied"?
This is a key distinction. "Supply" refers to the entire relationship between price and quantity, represented by the whole supply curve or schedule. "Quantity supplied" refers to a specific amount producers are willing to sell at a specific price. A change in the good's own price changes the quantity supplied (movement along the curve). A change in a determinant like technology changes the entire supply (shifts the curve).
Can supply ever be perfectly inelastic?
Yes, in theory. A perfectly inelastic supply means the quantity supplied does not change at all when the price changes. The supply curve would be a vertical line. Real-world examples are very rare but could include a unique, non-reproducible item like the original Mona Lisa painting. No matter how high the price offered, there is still only one original. In the short term, the supply of seats in a football stadium for next Saturday's game is also perfectly inelastic—they can't add more seats in a week.
How does supply interact with demand to set prices?
Supply is only one side of the market. The other side is demand (what consumers want to buy). The market price is determined where the supply curve and demand curve intersect. This point is called the equilibrium. At the equilibrium price, the quantity suppliers want to sell equals the quantity consumers want to buy. If supply increases (curve shifts right), the equilibrium price typically falls, and more is sold. If supply decreases (curve shifts left), the equilibrium price typically rises, and less is sold.
Conclusion
The concept of supply provides a clear window into the decision-making of producers. From the simple, upward-sloping law of supply to the factors that shift the entire curve, understanding supply helps explain how goods and services flow into our markets. It shows how producers react to price signals, changes in costs, and new technologies. When combined with demand, supply forms the powerful engine that determines what is produced, how much is produced, and at what price it is sold, making it a cornerstone of economic literacy for everyone.
Footnote
1 Inputs: Also called "factors of production" or "resources." These are the materials, labor, capital, and land used to produce goods and services.
2 Subsidy: A sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive. It is the opposite of a tax in terms of its effect on production costs.
3 PES: Price Elasticity of Supply. A measure of the responsiveness of the quantity supplied of a good to a change in its price.