Factors that Affect Supply

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Remember, S(x) = F [P(x), POG, C, Tn]

Supply is a function of price, the price of other goods, costs of production, and technology

Price

A change in the price of a good, will cause a movement along the supply curve, either up or down, depending on the direction of the price change.

If the price rise, then so too will supply.

If the price falls, then so too will supply.

This means that there is a positive relationship between price and supply

Why?

Producers want to maximise their revenue.

They do this by selling the most amount of products that they can at the highest price that they can.

Suppliers want higher prices, because it means more revenue.

When prices increase, suppliers focus more of their resources on producing more of that good, because they get more revenue from its sale than they did when the price was lower.

This is the reason why there is a positive relationship between price and supply

e.g. Imagine that Apple are currently producing 100 iPhones per day.

The price of an iPhone went from $500 to $600.

This means that for every iPhone sold, Apple get an extra $100.

It makes sense for Apple to increase their supply to 200, as the more they make, the more money they get, compared to if they had increased their supply to 200 a week ago before the price increase.

They want to sell as many as possible at the increased price

Price of Other Goods

Unlike Demand, when "Other Goods" referred to complementary goods and substitute goods, when we're talking about supply, "other goods" refers to the goods that the producer could sell as an alternative to the base good they are currently producing

Remember, producers want to supply goods with high prices (see above) to maximise their revenue.

This means that if the price of other goods (alternative goods that they can produce) were to rise, then they would reduce the supply of the base good, and increase the supply of other goods, to capitalise on the increased prices in that market.

Therefore, when the price of other goods rises, supply for the base good falls

And when the price of other goods falls, supply for the base good rises

e.g. Imagine a producer made apple juice and orange juice.

We will take apple juice as the base good, and orange juice as the other good.

When the price of the orange juice rises, the producer focuses its resources towards producing orange juice, and so the supply of apple juice falls.

The reverse happens when the price of orange juice goes down - the producer will then focus more on supplying apple juice, as it has a higher price.

Costs of Production

If production costs rise, then supply will reduce.

Conversely, if production costs fall, then supply increases.

Why?

Because the costs of production impact on the capacity to supply - if the producer has a budget of $150 for supply, and the costs of production increase from $10 to $15 per unit, then supply will reduce from 15 items to 10 items.

Technology

Technological advances can result in greater efficiency, and greater operating capacity.

These improvements combine to result in a greater supply.

Technology results in an increased supply

Factors that Affect Supply