Supply is the part of stock which a supplier offers for sale at a particular point of time at a particular price backed up by the willingness and ability to do so.
Change in quantity supplied : Movement along the supply curve
Change in supply : Shift of supply curve to the left or right.
Ceteris Paribus the law of supply states that quantity supply is direct to the price, if price increases supply extends and price decreases supply contracts.
Factors affecting Supply:
- Cost of the Factors of Production: Increase in cost of FOPs will cause increase in first cost. Supply will shift to the left vice versa.
- Indirect Taxes and Subsidies: Taxes increase costs; supply decreases. Subsidies decrease costs; supply increases.
- Price of related goods: competitive supply: Factors of production they control can be used to produce more than one good. If price of a product rises because of higher demand, producers will get attracted and aim to supply more of that product causing movement along the supply curve of the product and a shift to the left of the supply curve of the competitive good. (competing for resources)
- Joint Supply: Example Crude oil ⇒ petrol and diesel ; by-product, if demand for one increases, quantity supplied will increase and the supply will also increase for the other goods in joint supply.
- Future speculations :
- Changes in technology : Better technology; more efficiency; lower costs; increased supply
- Weather for markets vulnerable to weather conditions
Reasons for the Law of Supply
- Law of diminishing marginal returns: The law of diminishing marginal returns is a theory in economics that predicts that after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output. As it becomes less efficient as land capital are constant.
- Law of increasing marginal costs