Factors affecting Supply

Supply refers to the quantity of a good that the producer plans to sell in the market.

  • As price increases firms have an incentive to supply more because they get extra revenue (income) from selling the goods.
  • If price changes, there is a movement along the supply curve, e.g. a higher price causes a higher amount to be supplied.

Movement along the supply curve

inelastic-supply

Shifts in the Supply curve

This occurs when firms supply more goods – even at the same price.

supply

An increase in supply occurs when more is supplied at each price, this could occur for the following reasons:

  1. A decrease in costs of production. This means business can supply more at each price. Lower costs could be due to lower wages, lower raw material costs
  2. More firms. An increase in the number of producers will cause an increase in supply.
  3. Investment in capacity. Expansion in capacity of existing firms, e.g. building a new factory
  4. Related supply. An increase in supply of a related good e.g. beef and leather
  5. Weather. Climatic conditions are very important for agricultural products
  6. Technological improvements. Improvements in technology, e.g. computers, reducing firms costs
  7. Lower taxes. Lower direct taxes (e.g. tobacco tax, VAT) reduce the cost of goods
  8. Government subsidies. Increase in government subsidies will also reduce the cost of goods, e.g. train subsidies reduce the price of train tickets.

 

Definition: joint supply

Joint supply occurs when two goods are supplied together. E.g. If you produce beef you will get leather as a side effect.

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