The Allocation of Resources - Supply

This section focuses on understanding the concept of supply and how it is represented graphically. We will explore the factors that influence the supply curve and how to interpret its shifts.

What is the Law of Supply?

The law of supply states that, all other things being equal (ceteris paribus), as the price of a good or service increases, the quantity supplied will also increase. Conversely, as the price decreases, the quantity supplied will decrease.

The Supply Curve

The supply curve is a graphical representation of the relationship between the price of a good or service and the quantity producers are willing and able to offer for sale at that price. It is typically upward sloping, reflecting the law of supply.

Factors that Shift the Supply Curve

The supply curve can shift to the left or right due to changes in factors other than the price of the good itself. These are known as determinants of supply. A shift to the right indicates an increase in supply, while a shift to the left indicates a decrease in supply.

• Cost of Production: Changes in the cost of factors of production (e.g., wages, raw materials, energy) affect supply. Higher costs lead to a decrease in supply, and lower costs lead to an increase in supply.
• Technology: Improvements in technology usually lower the cost of production, leading to an increase in supply.
• Expectations of Future Prices: If producers expect prices to rise in the future, they may increase supply now to take advantage of the higher prices later.
• Number of Sellers: An increase in the number of sellers in the market will lead to an increase in supply.
• Government Policies: Government policies such as taxes and subsidies can affect the cost of production and thus the supply curve. Taxes increase costs, decreasing supply; subsidies decrease costs, increasing supply.
• Weather and Natural Disasters: These can significantly impact the supply of agricultural products or other goods reliant on natural resources.

Drawing and Interpreting the Supply Diagram

A supply diagram typically has price on the vertical axis and quantity supplied on the horizontal axis. The supply curve is drawn upwards from left to right. Shifts in the supply curve are represented by a parallel shift to the left or right.

Example: Impact of a Change in Cost of Production

Consider the market for wheat. If the cost of fertilizer (a factor of production) increases, the cost of producing wheat for farmers will rise. This will lead to a decrease in the supply of wheat. This is represented by a shift in the supply curve to the left. At any given price, producers will be willing to supply a smaller quantity of wheat.

Table Summarizing Supply Determinants

Determinant	Effect on Supply Curve
Cost of Production	Increase in cost: Decrease in supply (leftward shift)
Technology	Improvement in technology: Increase in supply (rightward shift)
Expectations of Future Prices	Expectation of higher prices: Increase in supply (rightward shift)
Number of Sellers	Increase in sellers: Increase in supply (rightward shift)
Government Policies (Taxes)	Increase in taxes: Decrease in supply (leftward shift)
Government Policies (Subsidies)	Increase in subsidies: Increase in supply (rightward shift)
Weather/Natural Disasters	Adverse weather: Decrease in supply (leftward shift)

Key Concepts

• Elasticity of Supply: This measures the responsiveness of the quantity supplied to a change in price.
• Short-Run vs. Long-Run Supply: In the short run, some factors of production are fixed, affecting the supply curve differently than in the long run where all factors can be adjusted.