SUPPLY
LESSON 6
Companies manufacture a wide
range of household products.
Market vendors sell perishable
goods, such as meat. Farmers
grow and produce fruit crops.
What do companies, market
vendors, and farmers have in
common? All of them represent
the supply side of the market.
Supply Defined
The selling decisions of producers can be explained
by the concept of supply.
Supply represents the goods or services that
companies, producers, and sellers provide to the
market. For most economists, supply refers to the
quantity of goods or services that sellers are both
willing and able to sell at certain conditions.
Since supply is a variable, it can be quantified. As
a condition, for supply to become effective,
sellers should have the willingness and the ability
to sell a good or service.
Law of Supply
Supply can be a relationship between the price of the good and
the quantity of that good. This relationship is called the law of
supply which explains how firms react to changes in price.
According to the law of supply, quantity supplied is positively
related to price. In this case, price is the amount of money a seller
charges for a good while quantity supplied is the amount of good
or service that a firm is willing and able to sell at a specific price.
The law of supply states that as the price of a good or service
increases, the quantity supplied rises, and as the price of a good
or service decreases, ceteris paribus. In other words, firms are
more willing to sell more at a higher price than sell at a lower
price.
For example, if the price of mangoes in the market increases,
farmers are encouraged to produce more. However, if the price of
MP3 players falls, manufacturers are not encouraged to sell more.
Supply Schedule
A supply schedule represents the relationship of
price to quantity supplied in a table form. In other
words, it lists the prices and the corresponding
quantities supplied for a particular good or service.
Supply can be represented on schedule as individual
supply or a market supply. An individual supply
shows the quantities supplied at each price by one
firm. A market supply is the sum of the individual
supply schedules of all firms in the industry. It is
derived by adding up the quantities that each firm is
willing and able to offer for sale at each price for a
particular good.
Consider the supply of pancit palabok. Presented
in table 6.1 is the hypothetical individual supply
schedule of a restaurant in a day selling pancit
palabok. At each price, the restaurant will sell a
certain quantity of pancit palabok. For instance,
at 40 pesos per serving, the restaurant will offer
60 servings of pancit palabok per day. At 80
pesos, there are 120 servings. At a price of 120
pesos, the quantity of pancit palabok supplied is
at its highest at 180 servings. This means that as
the price increases, the restaurant is willing and
able to offer more servings of pancit palabok.
Supply Curve
The law of supply can be graphed using the
supply curve, which serves as the graphical
representation of the supply schedule. The
supply curve plots the listed prices and quantities
from the given schedule. In graphing the supply
curve, the price is placed on the vertical axis,
and quantity supplied is labeled on the horizontal
axis. Each price and quantity combinations
correspond to the points on the graph. When the
points are connected with a line, supply curve is
derived. The supply curve of a restaurant selling
pancit palabok is shown in Figure 6.1.
Supply Equation
Change in Quantity Supplied
versus Change in Supply
Quantity supplied is a point on the demand
curve that shows how much is supplied at a
specific price. A change in quantity
supplied happens when its price varies,
ceteris paribus. When the price of a good
increases or decreases, this causes the
quantity supplied to change. The change is
represented by a movement along a supply
curve. The movement to a different point
(Point A to B or B to A) within the same supply
curve is shown in Figure 6.2.
On the other hand, a change in supply occurs
whenever there is a change in non-price determinants
of supply—input costs, technology, number of
producers, expectations, government actions, and
unpredictable events, ceteris paribus. For instance,
when the costs of production rise, this causes the
quantity supplied to change. The change in supply is
represented by the shift of the supply curve. A
rightward shift means increase in supply while a
leftward shift indicates decrease in supply. t. The shift
of the demand curve from S1 to S2 or S2 to S1 is shown
in Figure 6.3.
Non-Price Determinants
of Supply
Like demand, supply is not only influenced by price. There are
other factors that can increase or decrease the level of supply
which are referred to as non-price determinants of supply. The
determinants of supply are input costs, technology, number of
producers, expectations, government actions, and weather.
1. Input Costs.
Firms incur costs when they produce goods and services
including the prices of raw materials, rents, wages of workers,
interests and others inputs of production. Input costs are a key
factor that determines supply. If the input costs become more
expensive, the supply decreases. Consider for example, a rise in
the wages among workers will increase the production costs of a
firm and will lower its supply. A substantial fall in the price of
gasoline will likely decrease the costs of production, therefore,
increase supply.
2. Technology.
Advances in technology may change the level of
supply. Technology improves the productivity of
workers and increases the efficiency of the
production process. An improvement in
technology leads to an increase in supply. For
example, the application of technology like the
use of industrial robots causes an increase in
supply of many consumer electronics products
such as smartphones. Also, modern technology
in agriculture helps farmers to plant and produce
more crops like corn, rice and the like.
3. Number of producers.
Market supply also depends on the number of producers in the
market or industry. An increase in the number of producers may lead
to an increase in supply of goods and services. For example, if a new
restaurant opens and offers lunch meals in a city, supply of meals
will likely increase.
4. Price expectation.
Like buyers, firms expect the price of their goods to increase or
decrease in the future, which may affect their current supply. If price
is expected to rise in the future, current supply decreases, and if it’s
expected to fall, supply increases. Take for instance, a manufacturer
anticipates the price of shoes to go higher in the future so it cuts the
quantity it will sell, thereby decreasing supply. On the other hand, a
farmer expects the price of rice to decrease next year, so he decides
to produce and sell more rice this year, thus, increasing supply.
5. Government actions.
Government actions through the implementation of
policies may cause supply to change. These
government actions involve granting subsidies or
raising various taxes. A subsidy is an incentive
provided to firms by the government that can
improve the supply of a certain good. Subsidies tend
to increase market supply. Tax is an enforced
contribution imposed by the government to firms.
Taxes tend to cut supply as it raises the costs of
production. For example, the implementation of
TRAIN law in the Philippines increases the excise tax
on sweetened beverages, therefore, decreases the
supply of these products.
6. Unpredictable events.
Unpredictable events happened in a firm, caused
by nature, the economy, and other unforeseen
circumstances may change the level of supply.
These include labor and industrial disputes,
machine failure, bad weather due to typhoons and
floods, agricultural pests affecting crops, shortage
of imported commodities due to global recession,
among others. The COVID-19 pandemic is one
straightforward example as it disrupts the global
supply chain of commodities where exports and
imports have declined to all regions across the
world affecting the supply of many commodities.
