Supply
Supply: the quantities of a good or service that producers plan to sell at each possible price
during a certain period.
As in the case of demand, supply refers to planned quantities – the quantities that producers or
sellers plan to sell at each price. Just as consumers must be able to carry out their plans, producers
must be willing and able to supply the quantities concerned.
There is also no guarantee that the quantity supplied will actually be sold. The quantity actually
sold or exchanged will depend, among other things, on the demand for the good or service in
question. The quantity supplied during a specific period may therefore be greater than, equal to or
smaller than the quantity actually sold or exchanged.
Like demand, supply is a flow concept that is measured over a period of time (hour, day, week,
month, etc). It can also be expressed in words, schedules (numbers), curves (graphs) or equations
(symbols).
In microeconomics, we focus on the supply of a particular good. The total (or aggregate) supply of
all goods and services in the economy is a macroeconomic issue.
Market supply
Market supply: the combined result of the decisions of all the individual suppliers of the
product in question.
To illustrate the determinants and properties of supply, we consider the supply of tomatoes by
farmers in a fresh produce market.
What determines the supply of tomatoes in a particular year?
 The price of tomatoes: the higher the price of tomatoes, the greater the quantity that
farmers will plan to grow and sell, ceteris paribus.

The prices of alternative products: farmers’ decisions about how many tomatoes to
produce will also depend on the prices of alternative products (out-puts). If the price of
cauliflowers increases, relative to the price of tomatoes, they might plan to produce more
cauliflowers and fewer tomatoes. Likewise, if the price of cabbages falls, relative to the
price of tomatoes, they might plan to produce fewer cabbages and more tomatoes. These
outputs are sometimes referred to as substitutes in production.

Prices of factors of production and other inputs: The quantities of tomatoes that farmers
plan to sell at different prices will also depend on the costs of production. To make a profit,
they have to cover their costs of production. If the prices of one or more of their inputs (eg
labour, fertiliser, machinery) increase, a smaller quantity of tomatoes will be supplied at
each price than before, ceteris paribus. The reason, of course, is that it will cost more to
produce each quantity.
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
Expected future prices: Producers often have to plan long in advance. Farmers will
therefore be influenced by what they expect to happen in future when their tomatoes
reach the market. For example, the higher they expect the future price of tomatoes to be,
ceteris paribus, the more tomatoes they will plan to produce. In the case of non-perishable
crops, like wheat or maize, farmers may even withhold some of their produce from the
market in anticipation of a price increase. In other words, they may postpone their supply
to a future period.

The state of technology: new technologies (or production techniques) that enable
producers to produce at lower costs will increase the quantity supplied at each price. For
example, the introduction of new fertilisers or a new tomato which is less susceptible to
plant disease will tend to increase the supply of tomatoes, ceteris paribus.

Government policy: Subsidies on particular goods or services tend to raise their supply,
while taxes tend to reduce supply.

Natural disasters: floods, earthquakes and droughts have an impact on supply. In 2011, for
example, a major earthquake and tsunami in Japan destroyed many factories and reduced
the supply of a number of goods (including motor vehicle parts).

Joint products and by-products: Some products are produced jointly (eg sugar and
molasses, wheat and bran, beef and leather) with the result that a change in the supply of
the major product results in a similar change in the supply of the by-product. Joint
products are sometimes called complements in production.
So, in deciding what quantities of tomatoes to supply, farmers consider the price of tomatoes. This
price is affected by the demand for tomatoes, but they do not worry about how the price is
determined. They want to make a profit by selling tomatoes at prices that more than cover the
costs of their inputs. They have no guarantee, however, that they will be able to sell all the
tomatoes they plan to produce at each price. For example, when the market price is lower than
the price they expected, they may have to sell some tomatoes at a loss, or even destroy them.
Supply can also be expressed in a shorthand way by using symbols.
Let
Qs = quantity of tomatoes supplied
Px = price of tomatoes
Pg = prices of alternative outputs
Pf = prices of factors of production and other inputs
Pe = expected future prices of tomatoes
Ty = technology
N = number of firms supplying the product
… = allowance for other possible influences on the quantity supplied
The supply of tomatoes can then be expressed as
Qs = f(Px, Pg, Pf, Pe, Ty, N, …)
As in the case of demand, we focus primarily on the relationship between the quantity supplied
and the price of the good. We therefore state that…
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or
Qs = f(Px) ceteris paribus
We can also construct a supply schedule. The table on the next page is an example of such a
schedule. It shows the various quantities of tomatoes which farmers will supply at various prices
during a particular week. In contrast to the quantity demanded, the quantity supplied increases as
the price of the product increases.
The information in the supply schedule can be illustrated graphically by drawing a supply curve.
Once again we accord priority status to price above all other determinants of the quantity supplied
by indicating it on the vertical axis.
The supply curve has a positive slope, indicating that the quantity supplied increases as the price
increases. The points on the supply curve correspond to the different possibilities indicated in the
table. The fact that we join the points to draw a supply curve implies that there are also other,
intermediate possibilities (eg a price of R1,50 per kg and a quantity supplied of 750 kg).
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Supply curves are not necessarily linear, but to keep things simple we assume (for the moment)
that all supply curves can be represented by straight lines.
Movements along the supply curve and shifts of the curve
The supply curve below shows the relationship between the price of the product and the quantity
supplied, ceteris paribus.
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

At a price of P1 the quantity supplied is Q1, as indicated by combination a in the figure.
If the price increases to P2, the quantity supplied will increase to Q2, as indicated by
combination b in the figure.
The supply curve shows that the quantity supplied will increase if the price increases,
ceteris paribus.
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
If we want to know what will happen if the price of the product changes, we simply move
along the curve.
However, if one of the other determinants of the quantity supplied changes, this is indicated by a
shift of the supply curve. Whereas a movement along a supply curve (as a result of a change in the
price of the product, which we measure on the vertical axis) is referred to as a change in the
quantity supplied, a shift of the supply curve (as a result of a change in any factor other than the
price of the product) is called a change in supply. The two possible changes in supply are indicated
in the figure below.
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
Any factor which leads to an increase in supply (ie an increase in the quantity supplied at
each price of the product) will cause an outwards shift in the supply curve (SS to S2S2).
Any factor which results in a decrease in supply (ie a fall in the quantity supplied at each
price of the product) will cause an inwards shift in the supply curve (SS to S1S1).
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