You often purchase things are the supermarket, and you may not really think much of it, but whenever you do, you are forming an important part of the market system - the demand part. The opposite of this demand part is the supply part, which is the part of whoever sells you the items you buy from the supermarket. You may buy the items you buy because you have enough money for them and you need it, but why do you think the suppliers sell you the stuff that you buy? What causes a change in supply? What makes the supplier decide to sell or not to sell? What changes the behavior of the supplier? These are all questions that we are about to answer in this explanation, so read on!
Change in Supply Definition Economics
What is the definition of a change in supply in economics? First, a change in supply simply means an increase or decrease in supply. But we need to develop a better understanding of this, so let's start by explaining what supply is.
Supply simply refers to the availability of goods for purchase by consumers. A supplier must be both willing and able to make the product available for purchase. This means that while they may be able to produce a good, if they are not willing to sell it, then they are not a supplier. Economists tend to use the terms "suppliers" and "producers" interchangeably, so kindly take note of this.
Supply is the availability of goods for purchase by consumers.
Based on this definition, we know that any change in the willingness and ability of producers to make a given good available for purchase is a change in supply.
A change in supply is an increase or decrease in the willingness and ability of producers to make a given good available for purchase at a given price at a given time.
Now, we must note that every supplier can produce a limited quantity of goods at different prices. The quantity of goods supplier producers is referred to as the quantity supplied. On the other hand, the price refers to the amount of money a supplier charges for providing a good to consumers.
Quantity supplied is the quantity of goods available for purchase by consumers.
Price refers to the amount of money suppliers receive for selling a given quantity of goods at a given time.
Change in Quantity Supplied
A change in quantity supplied can occur when the price of the good changes. Changes in quantity supplied follow the law of supply, which states that the quantity supplied of a good increases as the price of that good increases.
A change in quantity supplied is an increase or decrease in the quantity of goods available for purchase by consumers.
Let's look at an example.
Clifford sells a bag of coffee for $1 per bag. At this price, Clifford is willing to sell 10 bags of coffee every day. However, everything remains the same, and just a price of a bag of coffee increases to $2 per bag. Clifford, seeing this, wants to make a lot of money, so he decides to produce more coffee.
This is the behavior of suppliers explained in economic terms.
Figure 1 shows a change in quantity supplied.
Fig. 1 - Change in quantity supplied
As illustrated in Figure 1, The change in quantity supplied is the movement along the supply curve between Q1 and Q2. A movement from Q1 to Q2 represents an increase in quantity supplied, whereas a movement from Q2 to Q1 represents a decrease in quantity supplied.
Causes of Changes in Supply
Before we explain the causes of changes in supply, let's look at what the supply curve is to illustrate these changes better. The supply curve is simply the graphical illustration of how the quantity supplied responds to changes in price. We plot it with the price on the vertical axis and the quantity supplied on the horizontal axis. Quantity supplied increases when price increases.
The supply curve is the graphical illustration of the relationship between price and quantity supplied.
Changes in supply can be seen as rightward or leftward shifts of the supply curve. Rightward shifts represent an increase in supply, whereas leftward shifts represent a decrease in supply. These shifts are shown in Figure 2 and Figure 3 below.
Fig. 2 - Decrease in supply
The decrease in supply is shown in Figure 1 as the shift of the supply curve to the left from S1 to S2.
Fig. 3 - Increase in supply
The increase in supply is shown in Figure 2 as the shift of the supply curve to the right from S1 to S2.
So, what causes the supply curve to shift? Or what are the causes of changes in supply? These are also referred to as the determinants of supply. The main causes of changes in supply are changes in input prices, technology, expectations, and the number of sellers.
The supply curve shows the quantity supplied at different prices. This means that the quantity supplied is a function of price and can be mathematically expressed as:
\(Q_S=Q_S(P)\)
Let's look at the causes of supply one by one, taking into consideration how they are related to this equation.
Input prices and a change in supply
Producers require inputs to produce the goods they make. When the prices of these inputs change, the behavior of the producers also changes.
For example, imagine a scenario where producers require raw coffee to make processed coffee bags. When the price of raw coffee decreases, producers will be able to buy more raw coffee to make their processed coffee bags, and this means that their supply will increase. The opposite of this occurs when the price of the inputs increases.
Based on this, we can see that supply increases when input prices (PI) decrease. The equation for quantity supplied can then be written as:
\(Q_S=Q_S(P, P_I)\)
Technology and a change in supply
Changes in technology are another important cause of changes in supply. This is because a change in technology can change the way suppliers produce their products. Let's have a look at an example.
Clifford currently employs three people to use one machine in a coffee processing plant. However, advancements in technology allow each person to use the same machine to produce just as much processed coffee as the three people. This means that Clifford now only needs to employ one person, and it will cost less to produce the same amount of coffee. Therefore, Clifford can now increase the supply of processed coffee.
Therefore, advancements in technology (T) increase supply and shift the supply curve to the right. As technology changes supply, the equation for quantity supplied can then be written as:
\(Q_S=Q_S(P, T)\)
Expectations and a change in supply
Suppliers want to make as much profit as they can, so they produce goods based on their expectations. If suppliers expect that they will be able to sell their products for a higher price in the near future, they will reduce their supply currently.
For example, Clifford, a supplier of processed coffee bags, hears rumors of a coffee shortage in the next month. This shortage will mean that whoever has coffee bags will be able to sell them at a higher price since coffee will be in high demand. This causes Clifford to reduce his current supply of coffee bags in hopes of selling them at a higher price later.
Therefore, expectations (E) of future price increases can cause a decrease in supply and shift the supply curve to the left. The equation for quantity supplied can now account for the impact of expectations as follows:
\(Q_S=Q_S(P, E)\)
The number of suppliers and a change in supply
The number of suppliers is an important determinant of supply. This is simple - the more suppliers of a good there are, the higher the supply of that good, and the fewer the suppliers of a good, the lower the supply of that good.
For instance, if there are only two shoemakers in a small town and one of these shoemakers retires from shoe making, this reduces the supply of shoes in that town.
Supply changes as a result of the number of suppliers (N). So, we can present the quantity supplied as a function of price and the number of suppliers. The equation becomes:
\(Q_S=Q_S(P, N)\)
Change in Supply vs Change in Quantity Supplied
You should note that a change in supply is different vs change in the quantity supplied. A change in quantity supplied simply refers to a change in quantity supplied when the price changes. On the other hand, when supply changes, this means there has been a change in the determinants of supply.
Fig. 4 - Supply graph
This difference can be explained using the variables on the supply graph in Figure 4, which shows a shift in supply from S1 to S2. A change in supply can only result from variables that do not appear on the supply graph (the determinants of supply). However, looking at S2, the quantity supplied at P2 is Q2, and this changes to Q3 as the price increases from P2 to P1.
Change in Supply Examples
Let's describe some examples of a change in supply.
Example 1.
Clifford used to supply his bags of coffee in the market using a horse that could carry one bag each run. However, automobiles were invented, and these could carry 10 bags of coffee at a time. Assuming all other things are equal, Clifford's supply of coffee bags increases because he can now transport 10 bags of coffee instead of 1 bag at the same cost.
Example 2.
Shoemakers in a small town buy leather at $20 per square yard and sell a shoe for $5. The price of leather drops to $1 per square yard. This makes the shoemakers buy more leather, enabling them to make more shoes to sell at the same old price.
Read our articles on Supply and Demand and Market Equilibrium to learn about how supply and demand interact with each other!
Change in Supply - Key takeaways
- Supply is the availability of goods for purchase by consumers.
- A change in supply is an increase or decrease in the willingness and ability of producers to make a given good available for purchase at a given price at a given time.
- The supply curve is the graphical illustration of the relationship between price and quantity supplied.
- The main causes of changes in supply are changes in input prices, technology, expectations, and the number of sellers.
- A change in quantity supplied occurs when price changes, whereas a change in supply results from a change in the determinants of supply.
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