In a market, there are two main players so called “Buyer” and “Seller”. This article will mainly focus on Seller side or Supply side which is equally important as Demand to create a healthy economy. The reader will learn characteristics of supply curve and five main determinants that has impact on supply curve in the following content.
Table of Contents
- 1 Law of Supply is a Study of a Relationship Between Supply And Price
- 2 The Determinants that Influence the Supply Curve
Law of Supply is a Study of a Relationship Between Supply And Price
Economists explain that the quantity supplied will vary directly with the price of the good while all other things remaining the same.
In other words, there is a direct or positive relationship between quantities of supplied and price. We can easily remember with this equation,
Ρ↑ ⇒ Qs↑ and Ρ↓ ⇒ Qs↓
(P= Price, Qs = Quantity of supplied)
Therefore, when the price of good goes up in the market, the quantity of supplied will increase because firms want to make more profit. Whereas, the quantity of supplied will decrease if the good are not selling well and market price goes down.
This is the simple logic that all producers practice in real world. Let’s move on to learn two types of supply curve and illustration to see bigger picture.
Purpose of Individual Supply Curve
It is an indicator which is used to measure/ look at the price and quantity supplied of each individual producer. As mention earlier, there is a positive correlation between price and quantity of supplied and higher price of good or service will attract to increase quantity of supplied to the market.
Objective of Market Supply Curve
It is an indicator to look at the accumulation of individual supply curves in a same market. With the same concept, firms’ willingness to supply reflect directly with the price of a good or service. For example, governor declares that Myanmar sugar quota to export foreign has increased for next fiscal year and thus attract more firms to participate and quantity of supplied will rise eventually.
Exhibit a. Market Supply Curve of Myanmar Sugar Export
Illustration of Supply Curve
Exhibit b. Supply Curve
Supply curve is upward slopping with quantity of supplied (Qs) on horizontal axis and price (P) on vertical axis.
The Determinants that Influence the Supply Curve
Now we have an understanding of role play of supply and its characteristics in a market.
So, next step is to learn what the five key main factors are and how they has impact on supply curve.
Seller’s Input Prices
Among the five determinants, cost of input is strongly influenced on supply curve. Circumstance like increased in price of raw materials, manpower, direct operation cost, and indirect operation cost will lead the supply curve shift to the left. Meaning that less supplied at market due to input price surge, whereas more will be supplied if input price fall.
The Price of Related Goods and Services
Related goods and services include two types a) substitute and b) complement. Substitute goods refers to one good or service that can replace with another.
Hence, an increase in the price of substitute goods or service will reduce the quantity supplied of one good or service.
This is applied for reverse way as well. A decrease in the price of substitute goods or service will increase the quantity supplied of another.
For example, Farmer A sells coffee and tea to supermarket, which are substitutes in production. Price of tea in market is expected to rise in coming year and therefore Farmer A decide to reduce the supplied of coffee (S1 to S2).
Exhibit c. Price increase for a Substitute
Complement goods refers to goods that are produced together from the same source or goods that must use together. Such as, printer and ink, rackets and balls are complements to use together, also leather and beef are complements in production. An increase in the price of complement goods will eventually increase the supplied of the other.
Future expectation or projection of sellers also influence the supply curve.
Let’s say the weather news state to have a typhoon in 6 months and from that the rice producers expect to get a higher price due to disaster.
In order to make more profit in the future, they decide to store some stock in warehouse by supplying less to market now. As a result, there is a downturn in quantity supplied.
The Number of Sellers
Another straightforward element that has impact on supply curve is changes in number of sellers.
The greater number of sellers in a market, the greater supplied of good or service will be and supply curve will shift to the right. With lesser number of sellers, lesser quantity of supplied will be and supply curve will shift to the left.
Last but not least, advances in technology has huge impact on supply curve as well.
In a way that technology helps to accelerate the productivity of the firm or reduce the input cost and thus will help producers to be able to supply more.
To give a high-tech are as an example, mobile price in the past is much more higher and less supply compare to nowadays. As a result of advances technology, there are more supplied in the market with various models, more function and customer can own mobile phone with few hundred dollars.
To summarized, supply curve is upward sloping and there is direct correlation between quantities of supplied and price of good or service.
Also, understanding of how supply curve behaves upon five determinants will alert both sellers and buyers about the economy.