Supply

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    Supply is the quantity supplied of a good or service that a producer is willing and able to sell at the market price for a given time period.

    Movement Along the Supply Curve A supply curve shows the price a producer is willing and able to sell at for each quantity supplied. Market supply is the sum of all the individual supplies from producers in a market. A positive relationship exists between price and quantity supplied. As the price of a good rises, ceteris paribus, the quantity supplied rises. So the supply curve slopes up.

    As price rises, quantity supplied rises because of:

    1) Signals.

    A higher price acts as a signal to producers that more profit can be made so quantity supplied rises.

    2) Resource Costs.

    To increase quantity supplied, producers must use more resources, so resource costs are bid up, production costs rise and prices must rise to cover the higher costs.

    3) New Producers.

    As price rises, this acts as a signal for new producers to enter the market, so quantity supplied rises.

    Movement/Shift of the Supply Curve An increase (decrease) in supply causes the supply curve to shift right (left). At each price, there is a higher (lower) quantity supplied.

    Many factors cause supply to change:

    1) Costs.

    As costs fall, it becomes cheaper to produce so the supply curve shifts right. Costs include raw materials, components, wages, transport etc.

    2) Technology.

    An improvement in technology increases efficiency and lowers costs so the supply curve shifts right.

    3) Education.

    An increase in workers’ educational quality means labour productivity rises, workers can produce more, so unit labour costs fall and the supply curve shifts right.

    4) Substitutes.

    Assume goods X and Y are substitutes. As the price of Y falls, producers switch to producing more X because it is more profitable relative to Y, so X’s supply curve shifts right.

    5) Climate.

    Agricultural output heavily depends on the climate. As the climate improves, more can be harvested so agricultural output rises and the supply curve shifts right. 6) Number of Producers.

    As more producers enter the market, total output rises so the market supply curve shifts right.

    7) Producers’ Objectives.

    If producers switch from sales maximization to profit maximization then less is produced so the supply curve shifts left.

    8) Indirect Taxes.

    An increase in indirect taxes on supply increases producers’ costs of production so the supply curve shifts left.

    9) Subsidies.

    A subsidy lowers a producer’s costs of production so the supply curve shifts right.

    10) Legislation.

    A legal barrier (maybe pollution charges) increases producers’ costs of production or limits their production so the supply curve shifts left.

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