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Lesson summary: Supply and its determinants
In this lesson summary review and remind yourself of the key terms, graphs, and calculations used in the analysis of supply. Topics include the distinction between supply and quantity supplied, the law of supply, and the determinants of supply.
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. |
Key Graphical Models
The supply curve demonstrates the relationship between a good’s price and the quantity producers are willing and able to supply. The upward sloping line demonstrates this direct relationship: as the price rises, the quantity supplied increases; as price decreases, quantity supplied decreases.
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.
Discussion questions
- How would producers of a good, such as candy canes, adjust their current supply if they expect its price to rise in the future?
- How will increased regulation of producers by the government affect a good’s supply? What other government interferences in a market can influence the level supply of a good?
- In a correctly labelled graph, show an increase in the supply of a good. In another, correctly labelled graph, show an increase in the quantity supplied of a good. Explain why these two are different.
Want to join the conversation?
What is a method for me to better remember the different detriments of supply?(6 votes)
Well, you will have to learn them by heart and there is unfortunately no way around that. But, there are numerous mnemonics out there.
For example, the mnemonic PINTS WC:
P-Productivity
I-Indirect Taxation
N-Number of firms
T-Technology
S-Subsidies
W-Weather
C-Cost(26 votes)
Do inferior goods disobey the law of supply too?(2 votes)
No, they don't. Let's go over the factors that change supply and see if they change for inferior goods.
Price of Inputs: When goods require less inputs (material, money, etc.), they are cheaper to make, so the supply increases. This would also apply to inferior goods.
Price of Related Goods: If a similar good is at a higher price AND makes you more profit, the supply of the original good would fall while the supply of the similar good rises. This would also apply to inferior goods: if those inferior goods make less money, the supply drops, and vice versa.
Number of Suppliers: When more people are making a good, the supply increases. The same would happen with inferior goods, for more people may make it which results in a rise of supply.
Technology Improvements: When a technology makes it cheaper or easier to produce a good, you can make more. Therefore, the amount of that good that can be produced increases, and the supply rises. The same can be applied to inferior goods; if inferior goods are now easier to make, you may as well make more of them.
Expected Prices: If the expected price of a good is greater than the current price, suppliers will hold back their goods so that they can sell them later at higher prices. This results in a drop of CURRENT supply. If an inferior good's price is expected to increase in the future, the suppliers will also hold back which drops supply.
Therefore, inferior goods obey the law of supply. Hope this helps!(14 votes)
- 1. If the producers expect prices to rise in future, they will decrease the supply of candy canes to the market, right now. They will start supplying in large quantities when the prices increase.
2. If the government imposes regulations, such as increasing taxes, supply will be reduced. If the government pays the producers in the form of subsidies, then the supply may increase.
3. Increase in supply of a good means a right shift in the supply curve. Whereas, increase in the quantity supplied of a good, can be seen as an increase in quantity supplied at a particular price.(4 votes) - The price refers to the price of supplying goods or the cost of goods?
Should be the money or the resources (cost) that need to spend for the supplying, right? This makes sense to the tutorial but I just want to make sure.(3 votes)- Yes, when it refers to prices in Supply it means the input prices and resource prices. For example, when Toyota wants to make a car the supply costs would be the prices of the steel, tires, seats, airbags, rims, and whatever else is needed to be bought by Toyota to assemble it into one car.(2 votes)
Let's say I'm a vendor who sells tomatoes. And the demand for tomatoes is high and so is the price. As a result, everyone including me starts getting more tomatoes to sell. Now, tomatoes are practically flooding in the market, and so the price would fall. Now because the price falls, hardly anyone is selling them, resulting in increased demand and the whole cycle keeps repeating.
In this case, does it not mean that as the price increases, the quantity supplied only increases to a point before it decreases again. Isn't it more like a sine function?(3 votes)
Well starting a tomato farm takes time, so does switching over to another produce. So you can't just jump from product to product hoping to make the largest amount of money possible.
So the tomato market would reach a point where it's more or less saturated and other farmers would sell something else, because they wouldn't see profit in the tomato market. At the same time you wouldn't leave it, because you're making money and switching is expensive.(1 vote)
- I dont get the difference of supply and quantity supply ㅠㅠ. Any one help me...(4 votes)
Quantity supplied is solely for price.
Change in supply is for things like cost of production.(0 votes)
- Do you have another example of derminants by supply?(2 votes)
- Qus 1 : According to higher priced expectation of candy canes , producers will decrease their current supply so that they will supplies more in higher prices in the future.
Qus 2 : Increased government regulation cause production costs to rise , reducing the supply of regulated good. Other government regulation such as subsidies ,taxes, Price ceiling ,and pice cap
Qus 3 : The key is what factor differentiate these two labeled graph. In this case , the increase in supplies’ graph is the correct one when we focus on change in non-price factors ,while the other one is not the result of non-price factors.(2 votes) 
What about competition? One company expects the cost of production to go up, so they increase the price of the good/service, but another decides to take this increasing price of company A to decrease their own. So company A increases the price while company B decreases. How does this affect things?(1 vote)- When one company increases prices due to higher production costs (Company A) and another decreases their prices to capture more market share (Company B), it showcases the competitive dynamics that can influence supply decisions. Company A's higher prices might decrease its quantity demanded, while Company B might see an increase in demand. This scenario could lead to varied effects on the overall market supply depending on the size and influence of both companies in the market.(1 vote)
what are the supply determinants(1 vote)- 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.
It is under "determinants of supply" in key terms(1 vote)
