The Allocation of Resources - Supply

Causes of Decreases and Increases in Supply

Supply refers to the quantity of a good or service that producers are willing and able to offer for sale at a given price during a specific period. Understanding the factors that influence supply is crucial for analyzing market equilibrium and the effects of economic changes.

Factors Affecting Supply

Several factors can cause either a decrease or an increase in the quantity supplied of a good or service. These factors are often referred to as the determinants of supply.

Factors Leading to a Decrease in Supply

• Increased Costs of Production: If the costs incurred by producers in producing a good or service increase, the profitability of production may decrease. This can lead to a reduction in the quantity supplied.

  Examples include:

  • Higher wages
  • Increased prices of raw materials
  • Higher energy costs
  • Increased taxes

• Technological Setbacks: If there is a negative technological change, meaning that the technology used to produce a good or service becomes less efficient, producers will likely reduce their output.
• Government Regulations: New regulations that increase the cost of production, such as stricter environmental laws or safety standards, can lead to a decrease in supply.
• Natural Disasters: Events like floods, droughts, or earthquakes can damage production facilities, disrupt supply chains, and reduce the amount of a good or service that can be produced.
• Changes in Producer Expectations: If producers expect future prices to be lower, they may reduce their current supply to avoid being stuck with unsold goods.

Factors Leading to an Increase in Supply

• Decreased Costs of Production: If the costs of production fall, producers can produce the same quantity of output at a lower cost. This increases their profitability and encourages them to supply more.

  Examples include:

  • Lower wages
  • Decreased prices of raw materials
  • Lower energy costs
  • Reduced taxes

• Technological Advancements: Improvements in technology can make production more efficient, allowing producers to produce more output with the same amount of inputs. This leads to an increase in supply.
• Government Subsidies: Government subsidies (financial assistance to producers) reduce the cost of production, encouraging producers to supply more of the good or service.
• Improved Skills of Labour: A more skilled workforce can increase productivity, leading to an increase in supply.
• Changes in Producer Expectations: If producers expect future prices to be higher, they may increase their current supply to take advantage of the higher prices.

The Supply Curve

The supply curve shows the relationship between the price of a good or service and the quantity supplied. It is typically upward sloping, reflecting the law of supply – that as the price of a good or service increases, producers are willing to supply more of it.

Shifts in the Supply Curve

Changes in the determinants of supply will cause the entire supply curve to shift. A shift to the right indicates an increase in supply, while a shift to the left indicates a decrease in supply.