Supply is a pattern of seller behavior that shows the amount of product he or she is willing and able to produce and make it available to sale at a particular price during a specific time.
Take a hypothetical example of a seller who produces and sells hand sanitizers. We can take a look at supplier production behavior through the table below that as the prices increase the supply increases. This pattern is true because with the increase in prices the suppliers have the incentive of making more money by supplying more.
|price of hand sanitizer||Quantity supplied per month|
Law Of Supply:
In economics, the law of supply is defined as a direct relationship between price and quantity supplied which means as the price of a product increases suppliers would supply more while keeping other things equal.
This case is the exact opposite of the law of demand in which as the prices increase the demand decreases but here as the prices increase suppliers will going to produce more. The reason for this is that customers are on the giving end and sellers are on the receiving end whatever sellers would earn it will be his or her revenue. As the revenue increases the supplier incentives for production increase because for each extra product they would earn more profit.
Justification for the law of supply:
- It’s a common-scene to produce more if it becomes the reason for more profit. Take the example of a farmer who has land, on which he used to plant tomatoes on half and potatoes on the other half. As in the market, the price of tomatoes increases, the farmer decided to plant tomatoes more than half of the land and decreased the production of potatoes to generate more profit. That is the reason why the supply of products increases as the prices increases.
- We can understand this also from a manufacturing perspective. As the prices of goods increase, the manufacture wants to produce more, but for more production, they need to hire more employees and equipment. In the case of increasing equipment or machinery, it takes time and a lot of money to purchase the equipment also the place to install those pieces of machinery. However, if they increase the number of employees without increasing the machines then increased labor would have to wait to use the machine to do work. So, if the supplier decided to increase the number of employees instead of purchasing new machinery each unit would cost him or her more than the previous one. Therefore supplier would only increase the number of production if he or she has the chance of earning more revenue.
Change in Supply Determinants:
In the law of supply, we consider the assumption of other things equals which is not the case in the real world. There are six other factors along with the price which determines the supply of goods in the market which are:
- Prices of required material for the product
- Technological innovation
- Subsidies and taxes
- Prices of substitutes goods
- Expectations of the producer
- Number of sellers present in the market
Change in these determinants shifts the supply curve either to right in case of an increase in supply and left in case of a decrease in supply. An increase in supply means suppliers would produce more at any price and a decrease in supply means would decrease the production at any price. For example, in the case of an increase in the prices of the required materials for the product would decrease the profit for the supplier and incentive to produce more. Like if the prices of sand, rock, and cement increase it would increase the cost to produce concrete, and hence incentives to produce more concrete decrease at any price it might be and shift the supply curve to left.