Determinants of Supply
Supply is the amount of a good or service that a supplier is willing to provide to the market. Innumerable factors and circumstances could affect a seller's willingness or ability to produce and sell a good. Some of the more common factors are:
Good's own price: An increase in price will induce an increase in the quantity supplied.
Prices of related goods: For purposes of supply analysis, related goods refer to goods from which inputs are derived to be used in the production of the primary good.
Conditions of production: The most significant factor here is the state of technology. If there is a technological advancement related to the production of the good, the supply increases.
Expectations: Sellers' expectations concerning future market conditions can directly affect supply.
Price of inputs: If the price of inputs increases the supply curve will shift left as sellers are less willing or able to sell goods at any given price. Inputs include land,labor, energy and raw materials.
Number of suppliers: As more firms enter the industry the market supply curve will shift out driving down prices. The market supply curve is the horizontal summation of the individual supply curves.
Government policies and regulations: Government intervention can take many forms including environmental and health regulations, hour and wage laws, taxes, electrical and natural gas rates and zoning and land use regulations and can have a significant impact on supply decisions.
Evaluating these externalities as well as others not listed, in light of the profit incentive of suppliers, provides insight into the movement of the supply of a good or service to the market.
Suppliers will shift production for non-price changes related to the determinants of supply and will slide production levels across the supply curve for price related movements .
Determinants of Supply
A price change in a good or service will result in a movement along the supply curve. An outward (inward) shift in the supply curve results from a change in a determinant of supply, such as technological progress (higher input costs), which allows a firm to produce more (less) for a given price level.
Quiz
1.
What is the Law of Supply?
A) Prices increase as quantity increases.
B) Price and quantity move in opposite directions.
C) Suppliers determine the quantity of production based on demand.
D) The quantity supplied will increase with an increase in price.
2
How are the supply schedule and supply curve similar?
A) They can depict the relationship between price and quantity only for a group of individuals.
B) They provide the same information.
C) They are not similar.
D) They are graphical representations of supply.
3
What is the price-to-quantity relationship typically depicted in a supply curve?
A) Downward sloping supply.
B) Correlation is dependent on demand.
C) Negative correlation between price and quantity supplied.
D) Positive correlation between price and quantity supplied.
4
The market supply curve depicts the suppliers' relationship between price and quantity.
A) All of the solutions provided.
B) The market supply curve is upward sloping.
C) Market supply can only be derived in a perfectly competitive market.
D) Suppliers have a positive correlation between price and quantity.
5
Which of the following will cause movement along the supply curve?
A) A change in the state of technology
B) A change in the price of the good
C) A change in the price of a substitute good
D) A decrease in government regulation
6
Which of the following will NOT result in a shift of the supply curve?
A) A decrease in government regulation.
B) A change in the price of the good.
C) Positive outlook on demand.
D) A technological breakthrough that reduces the amount of inputs needed but equals input savings.
7
What would occur if the costs of a necessary input increases?
A) The supply curve will shift to the left.
B) The quantity supplied will decrease along the supply curve.
C) The quantity supplied will increase along the supply curve.
D) The supply curve will shift to the right.
8
If the market price decreases for a good or service, holding all else constant, what happens to supply?
A) The supply curve remains unchanged; quantity will adjust as a movement along the supply curve.
B) The supply curve will shift inward.
C) The supply curve will shift outward.
D) Supply will increase along the supply curve.
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