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Supply Curve

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What is the Supply Curve?

Before proceeding with the supply curve, a little grounding is needed on the law of supply.


The Law of Supply is a basic theory in Economics which lays down that price increase would necessarily lead to the supplied quantity of goods or services, when all factors remain constant. 

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As shown in the above figure, the supply curve slopes upward. It graphically represents the Law of Supply. Suppliers will increase production with an increase in prices, and the same is depicted in the upward curve.  


For individual suppliers, aggregate supply is determined by the supply curve. A supply schedule can be framed for this purpose. The schedule would go on to show that at a particular price point, there is a corresponding quantity supplied. When all individual quantities are plotted, it makes up for an aggregate supply curve. 


Determinants of Supply Curve

The major determinants include –


1. Price of Input 

Input price has a major bearing on the supply curve. The costs of input are also known as ‘Factors of Production’. Such input includes materials, labour, machinery used for the production of services and goods. The costs can be further divided into explicit and implicit costs. 


2. Technology 

Technology has a direct impact on production cost as innovation is likely to cause higher productivity as well as cut down existing costs. Wasteful expenditure can also be conserved. All these will help to decrease input cost. 


However, the converse may also take place with technological decay. The efficiency of production, in that case, would come down.

 

Hence, technology improvement will cause an increase in supply and technology decay will cause a decrease in supply.


3. Number of Producers 

Greater number of producers automatically increases the supply. When a greater number of firms enters the market, there is an increase in supply. On the other hand, when a number of firms leave the market, there will be a decrease in supply. 


4. Expectations 

Production decisions are significantly affected by the expectations of supply price. Production would only be enhanced by firms when there is a reasonable expectation of a higher market price. Such expectation is generated based on certain credible evidence.


Hence, if there is an expectation of price rise, there will be an increase in supply. On the contrary, if there is an expectation of price fall, there will be a decrease in supply.


Movement along the Supply Curve 

Supply curve in Economics also exhibits movement along the curve. Movement along the supply curve is the graphical representation of alterations in goods or services supply on account of its price when all other factors remain constant.


If there is a price change, supply also changes. The movement will be from one point to another point on the same supply curve. Movement can be both rightward and leftward. 

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  • Rightward Movement 

The above figure shows that with price rise, more revenue is generated per unit if all other factors remain constant. Hence, to earn more profit, firms will supply more. This is termed as expansion in supply. 

  • Leftward Movement

The above graphical representation also shows that with a fall of price, firms tend to make less revenue, which automatically contracts supply. In this case, movement becomes evident by movement from a right side point to that of a left side point on the given supply curve. 


Supply Curve Shift 

The shift in supply curve will take place with the change of any of the determinants. For instance, with a change in costs, the supply curve will shift the position. 

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With a rise in cost, production becomes less at a given price — the supply curve shifts to the left. 

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The decrease in costs means that there can be more productive, which will result in a right-side shift in the supply curve. 

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FAQ (Frequently Asked Questions)

1. What Causes the Supply Curve to Shift Left?

Ans. There is a range of different factors that cause a supply curve to shift either left or left. Those factors include – (1) number of sellers, (2) prices of other goods, (3) prices of input (4) technology, (5) expectations about prices.


The left-ward shift of the supply curve is caused by two factors – expectations and prices of input. If there is an expectation on the part of sellers for prices to increase, the supplied quantity of goods may be decreased to be able to supply more at an increased price.


Furthermore, with an increase in resource costs, sellers will be disinclined to supply the same quantity on a particular price. With the supply constraint, the supply curve would again shift to the left.  

2. What is Measured by a Supply Curve?

Ans. The main components elucidated in the supply curve are the cost of services or goods and the supplied quantity over a period of time. It is a graphical representation of the direct correlation between the cost of particular services or goods the quantity.


In the graph, the cost price is indicated over the vertical y-axis and the supplied quantity represented against horizontal x-axis. The curve may be subject to a shift in right or left, depending on the alteration of contributing factors. 

3. What is Meant by the Law of Supply?

Ans. The Law of Supply postulates that with all other factors remaining constant, if the price of a service or product increases, the quantity of the services or goods supplied would also increase accordingly. The same phenomenon can be observed with price decrease as well. 


The underlying point to this theory is that suppliers would always want to do maximisation of profits by offering greater quantity at a higher sale price. It is due to the fact that businesses can generate higher revenue at a higher price by producing more.