Supply of goods and services
Factors influencing decisions    What is a market? Demand Supply Equilibrium Excess demand   Excess supply   Shifts of demand  Shifts of supply Convergence to equilibrium  Economicstutor..com.au

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1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix


The supply of a good or service represents the willingness or ability of suppliers or producers to produce and/or sell goods and services.  The most obvious factor determining the level of supply for particular products in markets is the price of the product.  If suppliers expect to receive a relatively high price for their product, then they are likely to be more willing to supply this product to the market because they expect to make a bigger profit (i.e. sales revenue minus costs). Conversely, if the price is expected to be low then they are likely to be willing to supply less of this product to the market because a smaller profit is expected.  


For example, assume that a farmer grows both apples and pears and devotes 100 acres to apple production and 100 acres to pear production.  If the market price of pears increased from $1.00kg to $1.50kg while the price of apples remained unchanged at $1.00kg, then the farmer would be likely to allocate more land (and other resources) to the production of pears and away from apples. The higher price of pears has resulted in an expansion of supply.  


This relationship between the price of a product and the willingness to supply is often referred to as the Law of Supply.  The law of supply states that as the price of a product increases, the supply increases, and when the price decreases the supply decreases. There is a positive relationship between quantity supplied and price.


This is highlighted in the two supply curves to the right.  As the price rises from P1 to P2, it encourages producers to supply more of the product, with supply increasing from QS1 to QS2.  The higher price therefore causes an expansion of supply, with more expensive products inducing a movement up along the supply curve. In contrast, a lower price causes a contraction of supply, with cheaper products inducing a movement back along the supply curve as producers decide to produce or offer fewer of these products to the market.


Like the demand curve, it is important to remember that the supply curve only captures the relationship between a change in price and the quantity supplied of a product. If supply of a product changes for any OTHER reason, it will shift the whole supply curve. See shifts of supply.  


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