There are two sides to the market. We just discussed the demand side which is where consumers demand a certain amount of goods at different prices. Now, we’ll look at the supply side of the equation.
Swag & Co is a company that makes only white sneakers.
We want to know how many white sneakers Swag & Co will produce at different prices. If white sneakers are selling for $200, Swag & Co would make a lot of money so they would be willing to make (supply) 3 pairs at that price. At a price of $150 they would not be making as much money so they would only make 2 pairs. At a price of $100 they would barely be making any money selling white sneakers so Swag & Co would only supply 1 pair.
We can make Supply Schedule which shows the relationship between the price and the quantity supplied.
|Price of White Sneakers ($)||Quantity Supplied|
Quantity Supplied is the amount of a good or service that a supplier is willing to supply at a given price.
QUANTITY SUPPLIED IS NOT THE SAME AS SUPPLY. This is a huge mistake people make in this course. What's the difference?
Supply is the relationship between price and quantity supplied and is usually shown as a line of a graph. Quantity supplied is a single point on that line.
Let’s graph this table out. Our Y-axis is going to price; the same as it was when we graphed a demand schedule. Our X-axis this time will be quantity supplied.
Now let’s plot out the points on our table. At a price of $200, Swag & Co is willing to supply 3 white sneakers. This point is shown as a red dot.
At a price of $150, Swag & Co is willing to supply 2 pairs of white sneakers. This point is shown as a red dot.
At a price of $100, Swag & Co is willing to supply 1 pair of white sneakers. This point is shown as a red dot.
There is clearly a linear relationship between the price of white sneakers, and how many pairs Swag & Co is willing to supply.
Notice how the supply curve is sloped upwards.
This example shows a very key economic concept.
The Law of Supply states that holding everything constant, when the price of a product increases, the quantity supplied increases.
Changes in Quantity Supplied
Remember that quantity supplied is NOT THE SAME as supply. All else constant, quantity supplied is only changed by price.
Currently in the market for white sneakers, shoes are selling at a price of $100. However, the price of white sneakers doubles to $200. What happens to the quantity supplied?
At a price of $100, Swag & Co is supplying 1 pair of white sneakers. When the price increases to $200, they are now willing to supply 3 pairs because they will make more money. This example can be solved on a graph.
A Change in price DOES NOT change supply. Again, quantity supplied and supply are not the same thing.
Changes in Supply
A change in supply refers to the demand curve shifting left or right due to a change in the relationship between the price of a product and the quantity supplied.
There are a few things that will change supply. Some increase supply which is shown as the supply curve shifting to the right while others decrease supply which is shown as the supply curve shifting to left.
What changes supply:
- Expected future prices
- Cost of inputs
- Prices of related goods
- Number of sellers
You will need to understand these factors and how they shift the supply curve. A lot of the test questions relate to this.
Expected future prices
White sneakers are currently selling for $150. If Swag & Co and all other white sneaker suppliers think the price of white sneakers will be $200 next year what will they do?
If they supply less this year and wait until prices are higher next year, they can make more money. This causes supply to decrease today and is shown as the supply curve shifting left.
If white sneakers are currently selling for $150 and Swag & Co believes the price of white sneakers is going to drop next year to $100, they will supply more this year because they won’t make as much money next year.
This causes supply to increase and is shown as the supply curve shifting right.
When it comes to making white sneakers, Swag & Co has several inputs. They have workers who assemble the shoes, raw leather, and white paint. Let’s say the price of leather does way down. This will make the shoes more profitable and shift the supply curve to the right.
If inputs are less expensive, supply will increase. This is shown as the supply curve shifting right.
Now let’s say that the price of white paint (an input for making sneakers) doubles and is now super expensive. Making shoes will not be as profitable and Swag & Co will supply less.
If inputs are more expensive, supply will decrease. This is shown as the supply curve shifting left.
Scientists discover how to make a robot that quickly makes shoes and paints them white. This robot makes Swag & Co’s process ten times faster. Swag & Co can now supply more white sneakers.
New technology that helps suppliers will cause an increase in supply. This is shown as the supply curve shifting right.
When technology decreases (this does not happen often) then suppliers will not be able to supply as much. An example of this would be a new machine breaking.
A decrease in available technology will cause an decrease in supply. This is shown as the supply curve shifting left.
Swag & Co is producing white sneakers when Uncle Sam and the US Government decide to put regulations on white sneaker production. The regulations make it more expensive for Swag & Co to produce shoes.
Increases in regulation make it more costly to produce. This lowers supply. This is shown as a shift in the supply curve to the left.
When regulations decrease, producing becomes more profitable and supply increases. This is shown as a shift in the supply curve to the right.
Prices of goods related in production
Swag & Co is making white sneakers when they find out that black sneakers are selling for way more money. Making white sneakers and black sneakers are very similar processes so Swag & Co switches to supplying black sneakers.
White sneakers and black sneakers would be considered substitutes-in-production.
A substitute-in-production is one of two (or more) goods that use the same resource for production in an exclusionary manner. The supplier cannot produce both; they must choose one of the substitute-in-production goods.
This means that Swag & Co can either make white sneakers or black sneakers but not both.
If the price of substitute-in-production goes up (black sneakers cost more), then suppliers will switch products (Swag & Co now makes blacks sneakers) which decreases supply. This is shown as the supply curve shifting left.
If the price of a substitute-in-production decreases (black sneakers are cheaper), then suppliers from other markets (the black shoe market) will switch into our market and increase supply. This is shown as the supply curve shifting right.
Whenever Swag & Co makes white sneakers they also make shoe laces. White sneakers and shoe laces would be considered complements-in-production.
A complement in-production are two or more goods that are jointly produced using a given resource. The production of one good automatically triggers the production of another, often as a bi-product.
If the price of shoe laces goes up, Swag & Co will produce more shoe laces which causes an increase in the supply of white sneakers.
If the price of shoe laces goes down, Swag & Co will produce less shoe laces which causes a decrease in the supply of white sneakers.
Number of sellers
If a lot more companies decide to make white sneakers, then the supply of white sneakers will increase. This will cause the supply curve to shift to the right.
If companies who already make white sneakers go out of business or leave the market, then the supply of white sneakers will decrease. This will cause the supply curve to shift to the left.