Change in Supply, Meaning, Concept and Example

Understanding the concept of "Change in Supply" is essential for comprehending the dynamics of market economics. In economic theory, supply refers to the quantity of a good or service that producers are willing and able to sell at different prices during a specific period. However, this quantity can fluctuate due to various factors affecting production capabilities and decisions made by suppliers.

Fundamental Concept of Change In Supply

• Number of sellers in the market
• Expectations held by producers about future market conditions
• Prices of raw materials or inputs required for production
• Technological advancements influencing production processes
• Prices of other goods that producers could potentially produce instead

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Supply and Demand Curves

Supply Curve:

• Positive Slope: Higher prices incentivise suppliers to increase production due to higher profitability.
• Determinants: Factors influencing the supply curve include input costs, technology, expectations of future prices, number of sellers, and government policies.
• Shifts: Changes in these determinants can cause the supply curve to shift left (decrease in supply) or right (increase in supply), altering the quantity supplied at each price level.

Demand Curve:

• Negative Slope: Lower prices attract more buyers, leading to higher demand.
• Determinants: Demand factors include consumer income, prices of related goods, tastes and preferences, population demographics, and expectations about future prices.
• Shifts: Changes in these factors cause the demand curve to shift left (decrease in demand) or right (increase in demand), affecting the quantity demanded at each price level.

Equilibrium:

Possibility of Changes in Supply

• Increase in Supply (Shift to the Right) : An increase in supply occurs when suppliers adopt new technologies that enhance production efficiency without affecting other factors. This leads to higher output at every price level. As a result, there is excess supply at the existing equilibrium price, prompting competition among suppliers to lower prices until a new equilibrium is reached. This results in a higher equilibrium quantity and a lower equilibrium price.
• Decrease in Supply (Shift to the Left ): Conversely, a decrease in supply happens when suppliers fail to adopt new technologies or face rising input costs, reducing their production capacity. This results in a lower quantity supplied at every price point. With decreased supply, there is excess demand at the original equilibrium price, causing prices to rise. This higher price attracts more suppliers into the market until a new equilibrium is established, characterised by a lower equilibrium quantity and a higher equilibrium price.

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What Causes Change in Supply?

• Input Costs : Changes in the cost of production inputs such as labor, raw materials, energy, or technology can significantly impact supply. For instance, an increase in the price of raw materials reduces profitability, prompting suppliers to decrease production unless they can pass on the cost to consumers through higher prices.
• Technological Advancements : Innovations and technological advancements can improve production efficiency, reducing the cost of production and increasing supply. For example, adopting new machinery or production methods can allow suppliers to produce more output with the same resources.
• Government Policies : Government regulations, subsidies, taxes, or incentives can affect production costs and supply. Subsidies may lower costs for producers, thereby increasing supply, while taxes or regulations could increase costs, decreasing supply.
• Number of Sellers : The number of firms or sellers operating in a market can influence supply. More suppliers entering the market can increase overall supply, while exits or closures of firms can decrease supply.

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