Supply

The number of units of goods or services a supplier is willing and able to bring to the market for a specific price

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Written by CFI Team

What is Supply?

Supply is a term in economics that refers to the number of units of goods or services a supplier is willing and able to bring to the market for a specific price. The willingness and ability to avail products to the market are influenced by stock availability and the determiners driving the supply. A change in prices impacts the market equilibrium too. A price increase will result in more supplies, and a decrease will result in the opposite effect.

Supply

Summary

Supply in economics refers to the number of units of goods or services a supplier is willing and able to bring to the market for a specific price.
The law of supply explains the reaction of the supplier when the prices in the market change.
Market supply, short-term supply, long-term supply, joint supply, and composite supply are five types of supply.

Understanding Supply

Ideally, in economics, consumers influence the supply of a product by indicating they need more units of a product, which drives prices higher. To the supplier, the market movements are a positive indication to increase the volume of supplies. However, the pattern may vary across products. At the point when the supply is equal to the demand, the price is said to be at equilibrium, i.e., there is no surplus supply or shortages.

However, as far as supply is at equilibrium, the consumer maximizes utility, and the suppliers enjoy optimal profits. Any more push of supplies in the market will disproportionately lead to suppliers incurring losses. Such an effect will reduce supply, which will tend to decrease prices until equilibrium is regained again.

Supply Elasticity Example

Products and services supply can only make sense when expressed against price and time. It is, therefore, sensible to state a farmer produced 20 crates of tomatoes over one month rather than just 20 crates, without expression of a time frame. In terms of supply, the farmer may sell a crate of tomatoes for $110. In this case, the farmer can produce 20 crates per month, where a crate is sold at $110.

Economically, price and time are an expression of the quantity of tomatoes produced and sold. This introduces the concept of elasticity. In supply elasticity, a shift in price can influence the farmer’s supply behavior. For example, the price per crate of tomatoes may rise to $115. This may be a positive indicator for suppliers to increase tomato supplies, for example, to 40 crates.

Such a noticeable transformation in the supply of goods is called elastic supply. However, if the change only leads to a minimal to no response, it is known as inelastic. The reasoning behind evaluating elasticity is to check the proportion change of supplied quantity when price changes. A significant increase in supply is marked as more elastic – the opposite calls for less elasticity or inelastic.

Overview of Supply Formulas

In economics, several mathematical formulas are used to calculate supply. However, the general concept is to express the impact of supply factors on the supply of goods and services.

One popular tool used to graphically simplify the concept is the use of the supply curve, which depicts the association between the price of a product and its quantity. An influence of a supply factor may lead to a shift in prices. The curve can show how many quantities are supplied when the price shifts. It is also used to explain market elasticity.

The Law of Supply

This law in economics explains the reaction of the supplier when the prices in the market change. In its simplest explanation, when there is a shift in the price of a particular product or service, suppliers tend to maximize profits by increasing the quantity of products supplied.

All factors in the market must remain constant. On the contrary, when prices fall, they tend to move the supply on the opposite side until equilibrium is met.

Types of Supply

Short-term supply explains that the ability of a purchaser to buy goods is constrained by the available supplies. Buyers cannot purchase beyond the supplied products.
Long-term supply explains the factor of time availability whenever the demand changes – meaning, the availability of time gives the supplier a leeway to adjust to a sudden shift in demand.
Joint supply explains the consequential supply. For example, lamb production affects meat and wool supply. In case farmers reduce farming lambs, meat and wool supply will go down, too. Similarly, an increase will result in the opposite effect.
Market supply explains the overall willingness and ability of all suppliers to supply the market a particular product on a day-to-day basis. For example, wheat suppliers A, B, and C may be willing to supply 5, 0, 6 kilos in the market at $1 per kilo for a total of 11 kilos. If prices rise to $2.50, the suppliers may increase to 10, 8, and 15 kilos, respectively. In total, the market supply amounts to 33 kilos.
Composite supply is used to explain the supply of products that serves more than one purpose. A perfect illustration is the mining of crude oil. The production of oil affects the manufacturing of petrol, gas, kerosene, diesel, etc.

Additional Resources

CFI offers the Capital Markets & Securities Analyst (CMSA)® certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below: