• The Nature of Supply

A firm is the main agent of supply.

Contents

Effective Supply

Effective Supply is defined as a firm's willingness and ability to supply a given quantity of a product at a particular price.

Relationship With Price

The relationship between supply and price is a direct one; the higher the price, the higher the quantity supplied, vice versa. The relationship between demand and price is completely opposite to this.

Factors Affecting Supply

There are many different determinants of supply:

  • costs of production - for e.g. wages, costs of raw materials, fuel bills of a company, etc. Supply curve shifts to the left if production costs increase, vice versa
  • level of technology - technology improves efficiency, reduces costs, saves time
  • objectives of the organisation - a profit-maximising business will have a supply curve to the left of a graph, a business trying to expand will have a supply curve to the right, etc
  • level of indirect tax - VATs and excise duties make the price of a product higher, they have the effect of shifting the supply curve to the left, price paid by consumers is higher than revenue received by firms
  • application of subsidies - when the government gives money to producers to help them cover the costs of production, they have the effect of shifting the supply curve to the right
  • number of producers - the more producers the greater the supply, more competition
  • time period - because production takes time, firms also make decisions about how much to supply on the basis of expected future prices

The Supply Curve

If there is a change in price, there will be a movement along the supply curve. If there is a change in any of the factors of supply, there will be a movement of the supply curve.

A supply curve shows how suppliers will react to a change in price.

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