Supply, or the law of supply, is the relationship between price and the quantity supplied of a good or service in a market. The law of supply states there is a positive relationship between price and quantity supplied; that is, the higher the price the greater the quantity supplied, and the lower the price the lower the quantity supplied, ceteris paribus (all other things being equal, or nothing else has changed). When discussing supply in a market, it is important to clearly define what market is being considered. If one says “the television market,” does this refer to the local, national, or global market? And which level is meant— retail, wholesale, or manufacturing? When discussing market supply, it is important to clarify the level and location under consideration and to define the time frame and other assumptions associated with analysis of supply in a market. It is often difficult for producers to adjust output in a short period of time. Supply relationships are usually studied with the ceteris paribus assumption. A supply curve, or graph portrays the relationship between price and quantity supplied in a market in a period of time, ceteris paribus. Producers respond to price changes by increasing or decreasing the quantity they are willing and able to provide to the market. Price is the independent variable, and quantity supplied is the dependent variable. A change in price causes a change in quantity supplied in the same direction as the price change. Other factors cause a change in supply, which is a shift of the whole price/quantity relationship in a market. An increase in supply means that at every price, producers are willing and able to provide more of a good or service. Likewise, a decrease in supply means producers are willing to provide less of a good at each price. While only a price change can cause a change in quantity supplied, economists have identified six factors that can cause a change in supply.
• price of factors (RESOURCES)
• price of related PRODUCTs
• expectations (producer)
• taxes and subsidies
• technology
• number of producers
Changes in the price of factors alter the cost of producing goods and SERVICES. If the cost of labor increases, either through increased COMPETITION for workers or changes in MINIMUM WAGE laws, firms will adjust their output. Increases in resource COSTS cause firms to decrease their supply in a market. Changes in the price of related goods motivate producers to increase or decrease their supply of what they produce. For example, if a television manufacturer can produce both small- and large-screen TVs, and the price of large-screen televisions increases, the firm will shift production away from small TV production into production of large-screen televisions. For centuries this has been the dilemma for farmers: Do they produce more corn and fewer soybeans, more cotton and less wheat? Farmers often make their choices based on last season’s prices, but by the time their products are available for market, prices have usually changed. If too many farmers shift PRODUCTION to crops with high prices the previous season, the market price will probably drop significantly. Producer expectations can affect their current supply decisions. If producers anticipate higher resource costs in the future, they may increase current production. If firms anticipate that new technology will make their current products less marketable, they may cut production to avoid having inventory they cannot sell or even increase current production to sell as much as possible before their current products become less competitive in the market. Changes in taxes and subsidies have the same effect on producer supply decisions as changes in resources. Taxes increase the cost of production, causing firms to decrease their supply. Similarly, subsidies decrease firms’ costs of production and result in an increase in supply. Many international trade disputes are centered on government subsidies for domestic industries, reducing their firms’ costs of production and making it difficult or impossible for foreign firms to compete. Changes in technology generally increase productivity. This allows firms to increase output, an outward shift of their supply curves. A major factor in the growth of the U.S. economy in the 1990s was the implementation of new cost-saving technology allowing firms in many industries to increase output. As the number of firms in a market increases or decreases, the market-supply curve shifts accordingly. Few firms want increased COMPETITION, but more firms in a market increases the supply available at every price.