The supply curve shows the relationship between price and quantity supplied. As price increases, suppliers offer more units for sale because each unit can be sold at a higher selling price. The higher selling prices are offset by the increased costs associated with making additional goods available to buyers or consumers. For example, assume that you are a supplier of widgets. You can sell each widget at a price of 10 dollars each. When you raise the price to11 dollars, then customers may demand that you produce more units before they buy from you.
Law of Supply
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 that lays down that price increase would necessarily lead to the supplied quantity of goods or services when all factors remain constant. 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
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. Explicit costs would include the price of labour and material, while implicit costs would comprise interest, rent, etc. While the former is paid out of pocket, the latter is considered to be an opportunity cost.
Technology has a direct impact on production costs 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 costs. 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.
Number of Producers
A greater number of producers automatically increases the supply. When a greater number of firms enter 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. One should note that the entry of new firms would alter the demand schedule in the market. This may either put pressure on existing firms or affect their operations, thus causing a decrease in supply.
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 a 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
The 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.
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.
The above graphical representation also shows that with a fall in 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 the 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. With a rise in cost, production becomes less at a given price — the supply curve shifts to the left. The decrease in costs means that there can be more productivity, which will result in a right-side shift in the supply curve.
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The conclusion of the article is that an increase in supply is likely to be seen with technological innovation, entry of new firms, and expectation of price rise. Meanwhile, a decrease in supply can be witnessed due to technological decay, the exit of existing firms, and the expectation of price fall. There are many factors that affect the production and hence, supply. Hence, a change in any of the determinants may result in a shift in the supply curve. One should ensure to adopt these methods to increase supply.
Ensure that there is a level of investment in production. Without any investments, supply cannot be increased. All these changes will aid to increase supply and hence, prove profitable for one's business.
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