What is supply?
Supply is the willingness and ability of producers to offer a given quantity of a good for sale at a
point in time and at a given price. Supply refers to the resources element of the central economic
problem of scarcity. The factors of production (land, labour, capital and enterprise) used to
produce goods and services are the supply side of a market.
For example, supply in the sportswear market is made up of the workers who work for
businesses like Nike and Adidas, the capital used to manufacture the sportswear products, the
raw materials used in production, and the entrepreneurs who organise and manage the
companies in the sportswear market.
The law of supply – how price affects quantity supplied
The law of supply states that an increase in price leads to an increase in the quantity supplied of
a good or service, and a fall in price leads to a fall in quantity supplied. There is a positive
relationship between price and quantity supplied.
The supply curve
The positive relationship between price and quantity supplied is illustrated by the supply curve.
Diagram 2.6 shows that a rise in the price soft drinks from 60c to 80c leads to a rise in quantity
supplied from 2 million to 3 million units. As the price changes, there is a movement along the
supply curve.
Profits and supply
The law of supply can be explained by the way in which a rise in price can lead to an increase in
producer profits. The increase in profit from a higher price gives producers a greater incentive to
increase supply. The higher price also means a higher unit cost of production can be covered by
the price. For example, if the unit cost of producing an extra unit of a soft drink increases as a
firm produces more, the higher price can cover this extra cost and make the increase in
production profitable.
Non price determinants of supply
Cost of factors of production
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Changes in the costs of the factors of production used to produce a good or service will affect
supply and cause the supply curve to shift. If, for example, the cost of coffee beans used by
coffee shops increases, then the supply of coffee from coffee shops will fall and the supply curve
will shift to the left. This is shown in diagram 2.7 where the supply curve for coffee sold in coffee
shop shifts from S to S1, and the price of coffee and the quantity of coffee traded falls. A fall in
the cost of factors of production would lead to an increase in supply, and the supply curve would
shift to the right. For example, a reduction in the minimum wage would reduce the cost of labour
for businesses like coffee shops and would increase supply.
Inquiry case example
Rising wage costs for German businesses
An €8.50 per hour minimum wage was introduced in Germany in 2015. In an attempt to improve
the living standards of the lowest paid workers the German government has increased the
earnings of people who work in industries such as, hospitality, retail and social care. The result of
the minimum wage which guarantees the lowest wage individuals can earn per hour has
dramatically increased labour costs for certain businesses. Many firms are now bracing
themselves for a further increase in costs as the German government looks to increase the
minimum wage to €12 per hour.
Think about the impact rising labout costs might be having on the supply curve of German
businesses in industries that employee large numbers of low paid workers such coffee shops.
Investigate other firms that have been affected by changes in wages.
Competitive supply
Many firms produce a range of good, and a change in the price of one good they sell may affect
the quantity supplied of other products they sell. An agricultural producer of soft fruit, for
example, might sell strawberries and raspberries. If the price of strawberries rises, the farm may
allocate more land to strawberries, which means less land is allocated to raspberries. As such,
the supply of raspberries will fall, and the supply curve for raspberries will shift to the left. This is
shown in diagram 2.8 where the supply of raspberries falls, resulting in their price increasing and
the quantity traded decreasing.
Joint supply
When a production process yields two or more goods at the same time this is called joint supply.
This means increasing the supply of one good will require increasing the supply of a good it is in
joint supply with. Joint supply often occurs in the agricultural industry with examples such as beef
and leather, wheat and straw, and mutton and wool.
Technology
As technology in the production process advances, the production capacity of firms increases. As
a result, they supply more to the market. This has been the case with manufactured goods like
computers, mobile phones, televisions and cars. You can also see the impact of technology on
supply in services such as online music and film streaming services. As technology in the mobile
phone market, for example, advances the supply of mobile phones increases, leading to a fall in
their price and a rise in the quantity traded.
Supply side shocks
A country or region may experience supply side
shocks which lead to a decrease in supply. This is particularly true in agricultural markets where
the weather can impact on growing conditions. Cold conditions in coffee growing areas can
dramatically reduce the output of coffee producers and the supply of coffee. The Tsunami in
Japan in 2011 led to a significant fall in the production of cars as many manufacturers were
forced to reduce ouput for a period of time.
Price expectations
Producer supply decisions can be affected by their expectations of what may happen to the price
of the good or service in the future. If, for example, a construction company believes that the
price of a building will be worth 20 percent more in two years’ time, they may wait for two years
before they put the building on the market, which reduces supply. If producers expect prices to
fall, they may increase supply in the present.
Number of producers in the market
As more firms enter a market, the supply in the market increases; as firms leave a market, the
supply falls. The growth of online shopping has led to a rise in the number of delivery
businesses. As more delivery firms enter the market, the supply of this service increases.
Inquiry case example
The supply of EVs
In Europe and North America carmakers are gearing up to make 2020 the year of the electric
car. The automotive market is going to see a wave of new models launched by leading
manufacturers such as BMW, General Motors, Honda and Fiat. The number of electric vehicle
(EV) models available to buyers will jump from fewer than 100 to 330 by 2025.
Electric vehicles have also become cheaper. Industry data shows that the prices of EVs have
fallen from an average price of $64,300 to $55,600 in 2019. A lot of this is down to Tesla’s
success in selling their Model 3, which has a starting retail price of $39,000. Tesla now
dominates the US EV market with nearly 80% of EV sales.
Changes on the supply side of the electric vehicle market are a key to its growth. The cost of
batteries, a key component in EVs, are becoming cheaper, and the number of EV producers in
the market has increased significantly. Many countries are also offering subsidies to encourage
people to buy them. These factors have increased the supply of electric vehicles, and are a key
factor behind the growth of the market.
Research into another market where technology is having a significant impact on supply.
