Text 12. SUPPLY

Supply is a schedule or curve showing the amounts of a product a producer is willing and able to produce and make available for sale at each of a series of possible prices during a specific period. This definition is worded to apply to product markets. To adjust it to apply to resource markets, substitute «resource» for «product» and change «owner» to «producer».

As price rises, the corresponding quantity supplied rises; as price falls, the quantity supplied falls. This particular relationship is called the law of supply. A supply schedule tells us that firms will produce and offer for sale more of their product at a high price than at a low price. This, again, is basically common sense.

Price is an obstacle from the standpoint of the consumer, who is on the paying end. The higher the price, the less the consumer will buy. But the supplier is on the receiving end of the product's price. To a supplier, price represents revenue and thus is an incentive to produce and sell a product. The higher the price, the greater this incentive and the greater the quantity supplied.

Consider a fanner who can shift resources among alternative products. As price moves up, the fanner finds it profitable to take land out of wheat, oats, and soybean production, and put it into corn. And the higher corn prices allow the farmer to cover the increased costs associated with more intensive cultivation and the use of more seed, fertilizer, and pesticides. The overall result is more corn.

Now consider a manufacturer. Beyond some production quantity, manufacturers usually encounter increasing costs per added unit of output. Certain productive resources - in particular, the firm's plant and machinery - cannot be expanded quickly. So the firm uses more of the other resources, such as labour, to produce more output. But at some point the existing plant becomes increasingly crowded and congested, meaning that each added worker produces less added output. As a result, the cost of successive units of output rises. The firm will not produce these more costly units unless it receives a higher price for them. Again, price and quantity supplied are directly related.

As with demand, it is convenient to represent supply graphically. We obtain the market supply curve by horizontally adding the supply curves of the individual producers. Note that the axes in such a graph are the same as those used in the graph of market demand, except for the change from «quantity demanded» to «quantity sup-plied» on the horizontal axis.

In constructing a supply curve, the economist assumes that price is the most significant influence on the quantity supplied of any product. But other factors (the «other things equal») can and do affect supply. The supply curve is drawn assuming that these other things are fixed and do not change. If any of them does change, a change in supply will occur - the entire supply curve will shift.

The basic determinants of supply are (1) resource prices, (2) the technique of production, (3) taxes and subsidies, (4) prices of other goods, (5) price expectations, and (6) the number of sellers in the market. A change in any one or more of these determinants of supply, or supply shifters, will move the supply curve for a product either to the right or to the left. A shift to the right designates an increase in supply: producers supply larger quantities of the product at each possible price. A shift to the left indicates a decrease in supply: Suppliers offer less output at each price.

Let's consider how changes in each of the determinants affect supply. As our discussion proceeds, remember that costs are a major factor underlying supply curves; anything that affects costs (other than changes in output itself) usually shifts the supply curve.

Resource prices. The prices of the resources used in the production process help determine the costs of production incurred by firms. Higher resource prices raise production costs and, assuming a particular product price, squeeze profits. This reduction in profits reduces the incentive for firms to supply output at each product price. In contrast, lower resource prices induce firms to supply more output at each product price since production costs fall and profits expand.

It follows that a decrease in resource prices will increase supply, shifting the supply curve to the right. If prices of seed and fertilizer decrease, we can expect the supply of corn to increase. Conversely, an increase in resource prices will raise production costs and reduce supply, shifting the supply curve to the left. Increases in the prices of iron ore and coke will increase the cost of producing steel and reduce its supply.

Technology. Improvements in technology enable firms to produce units of output with fewer resources. Because resources are costly, using fewer of them lowers production costs and increases supply. Recent improvements in the fuel efficiency of aircraft engines, for example, have reduced the cost of providing passenger air service. Thus, airlines now offer more air service than previously at each ticket price; the supply of air service has increased.

Taxes and subsidies. Businesses treat most taxes as costs. An increase in sales or property taxes will increase production costs and reduce supply. In contrast, subsidies are «taxes in reverse». If government subsidizes the production of a good, it in effect lowers production costs and increases supply.

Prices of other goods. Firms producing a particular product, say, soccer balls, can sometimes use plant and equipment to produce alternative goods, basketballs and volleyballs. Higher prices of these «other goods» may entice soccer ball producers to switch production to them in order to increase profits. This situation in production results in a decline in the supply of soccer balls. Alternatively, lower prices of basketballs and volleyballs may entice producers of these goods to produce more soccer balls, increasing their supply.

Expectations. Expectations about the future price of a product can affect the producer's current willingness to supply that product. It is difficult, however, to generalize about how the expectation of higher prices affects the present supply of a product. Farmers anticipating a higher corn price in the future might withhold some of their current corn harvest from the market, which would cause a decrease in the supply of corn. Similarly, if the price of Intel stock is expected to rise significantly in the near future, the supply offered for sale today might decrease. In contrast, in many types of manufacturing industries, expected price increases may induce firms to add another shift of workers or expand their production facilities, causing current supply to increase.

Number of sellers. Other things equal, the larger the number of suppliers, the greater the market supply. As more firms enter an industry, the supply curve shifts to the right. Conversely, the smaller the number of firms in the industry; the less the market supply. This means that as firms leave an industry, the supply curve shifts to the left. For example, the United States and Canada have imposed restrictions on haddock fishing to replenish dwindling stocks. As part of that policy, the Federal government has bought the boats of some of the haddock fishermen as a way of putting them out of business and decreasing the catch. The result has been a decline in the market supply of haddock.

The following is a checklist of the determinants of supply - factors which shift the supply curve - along with further illustrations. The only problem is that the determinants of supply and the examples are mixed up. Correct the mistakes, match determinants with the corresponding examples. Explain every move you are going to make. Give examples of your own to more vividly show the importance of the determinants of supply to your fellow-students.

Change in resource prices = An increase in the number of firms producing personal computers increases the supply of personal computers. Formation of women's professional basketball leagues increases the supply of women's professional basketball games.

Change in technology = A decline in the price of fertilizer increases the supply of wheat. An increase in the price of irrigation equipment reduces the supply of corn.

Changes in taxes and subsidies = A decline in the prices of mutton and pork increases the supply of beef.

Change in prices of other goods = The development of a more effective insecticide for corn root worm increases the supply of corn.

Change in expectations = An increase in the excise tax on cigarettes reduces "he supply of cigarettes. A decline in subsidies to state universities reduces the supply of higher education.

Change in number of suppliers = Expectations of substantial declines in future oil prices cause oil companies to increase current supply.