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
Shifts in the Supply curve
This occurs when firms supply more goods – even at the same price.
An increase in supply occurs when more is supplied at each price, this could occur for the following reasons:
- 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
- More firms. An increase in the number of producers will cause an increase in supply.
- Investment in capacity. Expansion in capacity of existing firms, e.g. building a new factory
- Related supply. An increase in supply of a related good e.g. beef and leather
- Weather. Climatic conditions are very important for agricultural products
- Technological improvements. Improvements in technology, e.g. computers, reducing firms costs
- Lower taxes. Lower direct taxes (e.g. tobacco tax, VAT) reduce the cost of goods
- 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.