Supply in market - Business Environment

The other side of the market is the supply side. In the market for goods and services it is the firm that is the supplier. The quantity supplied of a good is defined as the quantity that firms are willing and able to supply to the market at a particular price. Again notice the wording of the definition is such that it only includes effective supply and, as with demand, it is measured over a specific time period. The quantity supplied to the market depends on a number of factors, the most important of which are:

  • the price of the good;
  • the prices of other goods;
  • the prices of the resources used to produce the good;
  • technology;
  • expectations; and
  • number of suppliers.

In the same way as for demand, all factors other than price will be assumed to be constant and the relationship between quantity supplied and price will be considered first.Table provides some information on price and quantity supplied of beer.

Supply-and-Demand-for-'raw-brew' draught beer

The same information is represented graphically in Figure the line joining the points together is called the supply curve. The upwards-sloping curve illustrates ‘the law of supply’. This states that, as the price of a good rises, the quantity that firms are willing to supply also rises. This is because if costs are constant as we have assumed, then higher prices must mean higher profits to the firm. Note that there is no supply at a price below 90p per pint; this is the minimum price required by the producer to produce the beer. If the price per pint changes there is a movement along the supply curve in the same way as for demand. If any of the other factors listed above change there will be a movement of the supply curve.

Other prices
The supply of one good can be influenced by the price of another. For example, if the brewery in which Real Brew beer is brewed is also producing lager, then an increase in the price of lager (with the price of beer remaining the same) will encourage the firm to produce less beer and more lager, as lager is now more profitable to produce. The supply curve for beer would shift to the left, indicating that at every possible price, less is now supplied than before. If the price of lager fell, the supply of beer would increase. This is shown by a rightward shift of the supply curve. The size of the shift would depend upon the degree to which the goods could be substituted for each other in production, and the size of the price change.These shifts are illustrated in Figure.
Goods can also be complements in their production process; for example, beef and leather hides. An increase in the price of beef would increase not only the supply of beef but also the supply of hides. There would be a corresponding shift in the supply curve for hides.

The prices of the resources used in the production of the good
If any of the costs of production (wages, rent, rate of interest, and so on) increased, then the profitability of that good at each price would fall and there would be a tendency for supply to be reduced. The supply curve would move to the left. If costs of production fell there would be an increase in supply and a rightward movement of the supply curve. The extent of the shift depends upon the size of the price change, the significance of that factor in production, and the degree to which the factor could be substituted for another factor.
Technology
Technical development in all aspects of production has led to great improvements in output per worker. Such improvements generally result in either more being produced with the same resources, or the same being produced with fewer. In most cases it would also lead to a substitution of one factor of production for another. For example, car production becomes less labour intensive as robotic techniques take over. Even such a product as traditional British beer has benefited from significant technical improvements in production. The effect of such advances would result in increased supply at each price level and hence a movement of the supply curve to the right.

Business expectations

Expectations play a crucial role in the decision making of firms. Good expectations of the future would encourage firms to invest in new plant and machinery, which would increase their productive potential. Chancellors of the Exchequer are occasionally accused of trying to ‘talk the economy up’: that is, they may paint a rosy picture of the current and future state of the economy in the hope that this will enhance business expectations, and help pull the economy out of recession. If business does become increasingly confident, or perhaps more inclined to take risks, then this would shift the supply curve to the right. The reverse would shift it to the left.

The number of suppliers

As the number of suppliers in a market increases the supply will rise; the supply curve shifts to the right. If suppliers leave the market, supply will fall and the supply curve moves to the left.


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