Supply

The sellers or producers in a market are said to supply goods and services. Supply refers to the quantity of a good or service that firms are willing to sell at a given price and over a given period of time.

An upward-sloping supply curve

A supply curve is the quantity of a good or service that firms are willing to sell to a market over a range of different price levels in a given period of time. The supply curve slopes upwards from left to right for two reasons:

  1. As price rises, it encourages firms to supply more of a good to make more profit.
  2. As forms raise output in the short run, they face rising production costs. To cover the rising costs, firms need to be able to charge higher prices to consumers. Higher prices can enable marginal firms to enter a market.

The market supply curve is the horizontal summation of individual firm’s supply curves for a particular good or service.

Movement along a supply curve

There is a movement along a supply curve for a good only when there is a change in price. A rise in price causes and extension in supply, and a fall in price causes a contraction in supply, as shown in the next diagram.

[1st diagram on page 26]

Shifts in the supply curve

An increase in supply refers to the whole supply curve shifting outward to the right at every price level (to S2 in the diagram below). A decrease in supply refers to the whole supply curve shifting inwards to the left at every level (S1 in the diagram below).

[2nd diagram on page 26]

There are various factors that can shift the supply curve of a good. For example, the supply of oil could increase due to:

  • improvements in technology. e.g. the extraction of oil from more difficult places, sich as under the sea bed.
  • a reduction in labour costs e.g lower wages for oil platform and oil refinery workers
  • a reduction in capital costs e.eg oil platforms, pipelines and refineries
  • a reduction in transport costs e.eg an increase in size of oil tankers.
  • discovery of new oil fields e.g. in the Falklands
  • an increase in the number of firms in the oil industry
  • a decrease in the market influences of OPEC, a producer cartel
  • good weather making it easier to extract oil from Alaska or under the sea bed.
  • a reduction in indirect taxation on oil
  • an increase in government subsidies on producers
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