Description: Law of supply depicts the producer behavior at the time of changes in the prices of goods and services. When the price of a good rises, the supplier increases the supply in order to earn a profit because of higher prices.
The above diagram shows the supply curve that is upward sloping (positive relation between the price and the quantity supplied). When the price of the good was at P3, suppliers were supplying Q3 quantity. As the price starts rising, the quantity supplied also starts rising.
- The law of supply says that a higher price will lead producers to supply a higher quantity to the market.
- Because businesses seek to increase revenue, when they expect to receive a higher price for something, they will produce more of it.
- Meanwhile, if prices fall, suppliers are disincentivized from producing as much.
- Supply in a market can be depicted as an upward-sloping supply curve that shows how the quantity supplied will respond to various prices over a period of time.
- Together with demand, the law of supply forms half of the law of supply and demand.
The quantity of a good or service that producers are willing to supply in a market is influenced by various factors. These factors, known as determinants of supply, can affect the entire supply curve for a particular product. Here are some key determinants of supply:
-
Price of the Good or Service: As mentioned in the law of supply, there is a positive relationship between the price of a good or service and the quantity supplied. An increase in price generally leads to an increase in quantity supplied, assuming other factors remain constant.
-
Cost of Production: The cost of producing a good or service is a critical determinant. If the cost of production increases, producers may be less willing to supply the good at the existing market price, potentially leading to a decrease in supply.
-
Technology: Advances in technology can impact production processes, making them more efficient and cost-effective. Improved technology often leads to an increase in supply as producers can now produce more output with the same amount of resources.
-
Factor Inputs (Resources): The availability and cost of factors of production, such as labor, raw materials, and capital, can significantly affect supply. If there is a shortage or increase in the cost of these inputs, it may reduce the quantity that producers are willing to supply.
-
Number of Sellers: The number of producers or sellers in a market can influence supply. More sellers entering a market can increase overall supply, while a decrease in the number of sellers may reduce supply.
-
Expectations of Future Prices: Producers' expectations about future prices can influence their current supply decisions. If producers anticipate that the price of a good will increase in the future, they may reduce current supply to take advantage of higher prices later.
-
Government Policies: Various government policies, such as taxes, subsidies, and regulations, can impact the cost of production and influence supply. For example, a subsidy to producers may encourage higher levels of production.
-
Natural Disasters and Environmental Factors: Unforeseen events, such as natural disasters, can disrupt production and supply chains. Environmental factors, like weather conditions, can also impact agricultural output.
-
Changes in the Prices of Related Goods: The prices of goods that are substitutes or complements can influence supply. For example, if the price of a substitute for a good increases, producers may shift their resources toward the production of that good, reducing supply in the original market.
These determinants interact to shape the supply curve for a particular good or service, illustrating how changes in these factors can lead to shifts in the overall supply. It's important to note that these determinants are interrelated, and changes in one can affect others.
Equilibrium is the state in which market supply and demand balance each other, and as a result prices become stable. Generally, an over-supply of goods or services causes prices to go down, which results in higher demand—while an under-supply or shortage causes prices to go up resulting in less demand.
- A market is said to have reached equilibrium price when the supply of goods matches demand.
- A market in equilibrium demonstrates three characteristics: the behavior of agents is consistent, there are no incentives for agents to change behavior, and a dynamic process governs equilibrium outcomes.
- There are several types of equilibrium used in economics.
- Disequilibrium is the opposite of equilibrium and it is characterized by changes in conditions that affect market equilibrium.
- In reality, markets are never in perfect equilibrium, although prices do tend toward it.
Normal goods and inferior goods are concepts in economics that describe how the demand for a good changes in response to changes in income.
-
Normal Goods:
- Normal goods are those for which demand increases as consumer incomes rise and decreases as consumer incomes fall.
- The relationship between income and demand for normal goods is positive. As people's incomes increase, they are likely to buy more of these goods.
- Examples of normal goods include higher-end clothing, luxury items, and certain types of electronics. As people's incomes increase, they are more inclined to spend on these goods.
-
Inferior Goods:
- Inferior goods are those for which demand increases as consumer incomes fall and decreases as consumer incomes rise.
- The relationship between income and demand for inferior goods is negative. As people's incomes decrease, they may shift their consumption towards these goods.
- Examples of inferior goods include generic or store-brand products, certain types of low-quality goods, and some basic food items. When incomes are low, people may opt for these goods over more expensive alternatives.
It's important to note that whether a good is considered normal or inferior depends on the context of the specific market and the income levels of the consumers involved. Additionally, the classification of a good as normal or inferior is based on the income elasticity of demand, which measures the responsiveness of quantity demanded to changes in income.
Price elasticity of supply is the responsiveness of a supply of a good or service after a change in its market price. According to basic economic theory, the supply of a good will increase when its price rises. Conversely, the supply of a good will decrease when its price decreases. This happens because producers want to take advantage of a rise in price, so they increase production of their goods and services until demand is exceeded—at which time prices begin to fall. Producers then decrease output to match the price decline.
Also see: [[Chapter 02 - Demand#What Is Price Elasticity of Demand? / What Is Elasticity of Demand?]]
Elasticity of Supply: https://youtu.be/gguIcyQzSog?si=G66IYuCeeCDdFqgt
Price elasticity of supply has five possibilities:
- Perfectly elastic: The result is an infinite number
- Elastic: The result is less than one
- Unitary: The result equals one
- Inelastic: The result is greater than one
- Perfectly inelastic: The result is equal to zero.
How Does Price Elasticity Affect Supply: https://www.investopedia.com/ask/answers/040615/how-does-price-elasticity-affect-supply.asp
So, if the corn from your farm has a price elasticity of supply equal to 0.2, it is elastic.