SAD - Supply Lesson
Supply Lesson
Principal of Supply Video
Supply (S) refers to the number of units of a good or service suppliers are willing and able to offer for sale in the market at various prices.
View the following video to learn more about the principle of supply. To make the video full screen, click the double arrows at the bottom right corner of the object.
Example: The Supply of Gasoline in the City of Atlanta
| Price per Gallon | Quantity Supplied per Week |
| $1.90 | 65,000 |
| $2.00 | 70,000 |
| $2.10 | 80,000 |
| $2.20 | 95,000 |
The Law of Supply states that price and quantity supplied have a positive (or direct) relationship. This means price and quantity supplied move in the same direction. As the price of a good rises (or falls), the quantity supplied will rise (or fall), ceteris paribus. Due to this relationship between price and quantity supplied, supply curves will typically be upward sloping (positively sloped).
Quantity Supplied (QS) - The amount of a good that producers are willing to offer for sale at a particular price of the good.
Example - At a price of $2.00, producers will supply the market with 70,000 gallons of gas. Because it is a quantity associated with a specific price, it is referred to as the quantity supplied at that price.
Change in Quantity Supplied (ΔQS) - This phrase denotes a change in the number of units suppliers wish to sell in response to a change in price only. It is shown graphically by a movement along the existing supply curve.
Example - Suppose the price of gasoline increases from $2.00 to $2.10, ceteris paribus. This increase in price results in an increase in the quantity supplied from 70,000 to 80,000 gallons (the law of supply is in effect). It is shown by a rightward movement along the supply curve.
Supply Curve for Gasoline
The Determinants of Supply
The determinants of supply include all those other factors, unrelated to the price of a good or service, which influence how much of a good suppliers will offer for sale. Below are the basic categories for the determinants of supply:
Cost of Inputs: As inputs become more expensive, suppliers will offer up less of a good/service for sale. The opposite is true.
Productivity: Increases in productivity will increase supply. The opposite is also true.
Changes in Technology: Improvements in technology will tend to increase supply.
Number of Suppliers in the Market: An increase in the number of suppliers will increase the supply of a good. The opposite is also true.
Government Regulations: Regulations tend to decrease supply in a market (it increases the cost of production). Deregulation tends to increase supply in a market.
Taxes: Taxes, if per unit, will decrease supply.
Subsidies: Subsidies, if per unit, will increase supply.
Supplier Expectations: If suppliers believe the price will be higher in the future, they will supply less today. If suppliers believe the price will be lower in the future, they will supply more today.
Example: Some of the determinants of the supply of gas include the wages paid to workers in the industry, the cost of refineries, and government regulations (quality of fuel).
Change in Supply (ΔS)
A change in supply occurs because of a change in one of the determinants of supply listed above. It is shown graphically by a shift of the entire supply curve. If supply increases, the original supply curve will be replaced by a supply curve located to the right of the original (the original curve experienced a rightward shift). If supply decreases, the original supply curve will be replaced by a supply curve located to the left of the original (the original curve experienced a leftward shift). It is appropriate to use "right" and "left" to categorize these shifts because supply is measured on the x-axis and numbers get larger as you head to the right on the x-axis and smaller as you head to the left on the x-axis.
Example: Suppose the price of crude oil decreases. This will make it less expensive to produce a gallon of gas. Suppliers will tend to offer more gallons of gas on the market at any given price.
| Price per Gallon | Original QS per Week (S) | New QS per Week (S1) |
| $1.90 | 65,000 | 70,000 |
| $2.00 | 70,000 | 75,000 |
| $2.10 | 80,000 | 85,000 |
| $2.20 | 95,000 | 100,000 |
Analyzing the type of change:
- How has the amount suppliers want to sell changed?
- What caused the change in the amount sellers want to supply?
- How would this be displayed graphically?
Change in Supply Practice
Click on the answer for each question to test your knowledge.
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