Supply and its determinants

Posted 2023-02-24 17:17:03

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The law of supply

The law of supply states that there is a positive relationship between price and quantity supplied, leading to an upward-sloping supply curve. Sellers like to make money, and higher prices mean more money!

For example, let’s say that fishermen notice the price of tuna rising. Because higher prices will make them more money, fishermen spend more time and effort catching tuna. As a result, as the price rises, the quantity of tuna supplied increases.

The determinants of supply

Factors that influence producer supply cause the market supply curve to shift. For example, one of the determinants of supply in the market for tuna is the availability and the price of fishing permits. If more fishing permits are made available and the permit fee is lowered, we can expect more fisherman to enter the market; as a result, the supply of tuna will likely increase. Now, at every price, a greater quantity of tuna will be supplied to the market.

Key Terms

Term	Definition
supply	a schedule or a curve describing all the possible quantities that sellers are willing and able to produce, at all possible prices they might encounter in a particular period of time; supply is represented in a graphical model as the entire supply curve.
law of supply	all other factors being equal, there is a direct relationship between a good’s price and the quantity supplied; as the price of a good increases, the quantity supplied increases; similarly, as price decreases, the quantity supplied decreases, leading to a supply curve that is always upward sloping.
quantity supplied	the amount of a good or service that sellers are willing to sell at a specific price; quantity supplied is represented in a graphical model as a single point on a supply curve.
change in quantity supplied	a movement along a supply curve resulting from a change in a good’s price
change in supply	a movement or shift in an entire supply curve resulting from a change in one of the non-price determinants of supply
determinants of supply	changes in non-price factors that will cause an entire supply curve to shift (increasing or decreasing market supply); these include 1) the number of sellers in a market, 2) the level of technology used in a good’s production, 3) the prices of inputs used to produce a good, 4) the amount of government regulation, subsidies or taxes in a market, 5) the price of other goods sellers could produce, and 6) the expectations among producers of future prices.

Common Misperceptions

You may often hear people say, incorrectly, that higher prices lead to “more supply” and that lower prices lead to “less supply.” However, this is an incorrect use of the terms. Higher prices will result in an increased quantity supplied and lower price will result in a decrease in quantity supplied. Only a change in a non-price determinant of supply causes a good's supply to increase or decrease.