The Supply Curve
In the same way that price has a significant effect on the quantity of goods demanded by consumers; it also has a significant effect on the quantity of goods supplied by producers. This is because, as the market price of any good increases, the market becomes more valuable and attractive to producers, leading to new customers entering the market and existing producers increasing their production volumes. In contrast, as the price of a good falls, so the quantity suppliers are willing to produce falls as they attempt to keep the price high and avoid making any losses. This can be seen most clearly in the price for commodities such as oil. As the oil price rises, so it becomes more economical to extract oil from deeper sources which are harder to reach. Existing oil fields also increase production to take advantage of the price increase. However, as the price falls oil fields and companies will reduce production to conserve their reserves for the future. Some oil fields will also stop production altogether, as they can no longer make a profit from buying and selling oil.
As a result, for most goods, when all other factors are held constant, the quantity supplied will rise as the market price rises. This allows for the construction of a supply schedule and a supply curve.
Again, as with the demand curve, price is displayed on the y axis, whilst quantity is on the x axis. This is the accepted convention, because the price is set by the market: individual firms generally only have the ability to set their own production levels: they cannot fix the market price. As such, whilst the market price will determine the quantity produced by an individual firm, the quantity produced by all firms will determine the ultimate price, hence the price is shown as the dependent variable.
Similar to the law of demand, the law of supply states that as prices rise, so the quantity of goods supplied by all producers will rise, hence the supply curve has an upward slope. In addition, as with the demand curve the supply curve is often shown as a straight line to make analysis simple. However, in practice the slope of the supply curve will be determined by factors such as the minimum efficient size of factories and the economies of scale of the industry, and hence will not be a perfect straight line.
Whilst the supply curve demonstrates how price changes with respect to quantity, with all other factors held constant, any changes in the other economic or social factors can cause the supply curve to shift. These shifts are referred to as either being to the left or to the right. A shift to the left indicates that producers will reduce the quantity they produce at a certain price, whilst a shift to the right indicates they will increase the quantity they will supply for each price. The factors that can cause this are:
- The prices of and demand for other goods: if the price of computers suddenly rises, many TV producers may switch to making computers. This would cause the supply curve for TVs to move to the left as less producers are making TVs
- The number of producers in the market: more sellers will produce more goods, and engage in price wars. This will move the supply curve to the right, as the quantity increases for a set price
- The prices of input materials: if the materials used to produce a good increase in price, it will cost producers more to make a good. Hence the supply will move to the left as producers require higher prices to continue production
- Production efficiency: as production processes become more efficient, producers can make goods for a lower cost, hence the supply curve moves to the right
- Price expectations: if prices are expected to increase, sellers may decrease the quantity they currently supply, stockpiling materials and finished goods to enable them to sell more when the price increases
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