There are many factors affecting supply in economics.
When price changes, quantity supplied changes. This is because price affects revenue which in turn affects profit. Remember, producers respond to price incentives. They react to price changes, hence quantity supplied will change.
Other factors that cause supply to change are non-price factors. When input prices change, the cost of production changes. Hence, supply changes.
1 Let’s imagine we are all producers.
And think like producers.
2 We love profits like bees love honey.
3 Revenue minus cost gives us profit.
4 So anything that increases profit,
Will make us produce, produce and produce.
Money, Money, Money!
5 First, prices.
When price increases, revenue increases. (pause)
Hence, profits increase.
That’s a signal to produce more.
In other words, increase quantity supplied.
6 Input prices.
Suppose we bake and sell cakes.
Eggs, flour and labor all cost money.
When price of inputs like eggs increases,
Baking cakes become less profitable.
So we’ll supply fewer cakes.
We used to bake with these.
8 Due to improvements in technology,
We now bake with these.
Our productivity increases.
So better technology helps us save cost.
Which increases our profits.
We’ll gladly supply more cakes. Yum yum…
9 Competitive Supply.
As bakers, we can bake cakes…or bread.
If price of bread increases,
This means baking bread is more profitable.
Then…we should bake more bread!
Crap, supply of cakes has to decrease.
Why? Because we use the same resources to bake bread and cakes.
When we bake more bread,
We have fewer resources left / to bake cakes.
10 In this case, we say that cakes and bread / are in competitive supply,
When supply of bread increases,
supply of cakes has to decrease.
11 There’s another type of supply called joint supply.
For example, beef and leather.
To produce more beef,
we have to slaughter more cows.
This allows us to produce more leather too.
So we say that beef and leather are in joint supply.
When supply of beef increases,
supply of leather increases as well.
12 Expectation of future prices.
Suppose you own some gold.
If you think the price of gold is going to fall in the future,
Sell the gold as soon as possible
before its price falls further!
13 So supply of gold today will rise.
14 If you think price is going to rise in the future,
15 Then keep the gold today
so that you can sell it at a higher profit in the future.
So supply of gold today will fall.
Remember the tsunami that hit Japan in 2011?
That destroyed many factories.
So supply of many stuff like cars and electronics decreased in the short term.
17 And of course, with good weather,
18 Number of producers.
In 2010, if you wanted a tablet,
You had to get an Ipad.
19 As more manufacturers entered the tablet market,
You have many choices today.
When number of producers increases,
Supply increases and vice versa.
20 So this is the summary.
there are so many factors affecting supply.
21 How do I graph the supply curve?
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Next up: Supply curve.
When technology improves, it decreases cost of production. It becomes easier and cheaper to produce goods. So supply increases.
We say 2 goods are in competitive supply when they require the same resources for production. For example, corn and wheat are in competitive supply-- they both require agricultural land. When you produce more corn, you have less land left for the production of wheat. So you produce less wheat. For such goods, their supply changes in opposite directions.
We say goods are in joint supply when they are produced jointly. For example, beef and leather. The increase in production of beef will definitely increase the production of leather.
Producers change their supply of goods based on their future expectation of prices too. For instance, if farmers think that the price of rice in the future is going to increase, they may withhold their current supply of rice in order to sell it in the future at a higher price. So the current supply of rice decreases.
Weather and natural disasters change supply too. Natural disaster like hurricanes and tsunamis destroy resources so supply decreases. Man-made calamities like wars also destroy resources. So wars decrease supply too.
Well, the number of producers in a market changes supply too. As the number of producers increase, supply increases.