Generally, assuming all other factors are constant, quantity supplied increases as price increases. This is because higher price justifies the higher costs of larger volume of production for a firm and more importantly higher price allows for greater revenue which means that there is an increased potential for more profit to be made.
The generalisation can be shown on a graph of price against quantity of sales in a certain time period. This is shown in diagram 1. If price rises from P1 to P2 in diagram 1 then one may expect most producers in that market to raise production in order to gain more revenue. Thus the shift along the supply curve results in overall quantity sold to become Q2. This conclusion is made on the assumption that stock levels of this good are negligible and that economies of scale as well as diseconomies of scale play no part in production.
Factors affecting SupplyEdit
There are several factors which affect supply. Fundamentally the higher the cost of production the lower the output will be per each possible price. Thus anything which affects the cost of factors production will affect supply. Thus the following factors may affect supply:
- Technology.Generally in classical economic theory any improvement in technology will probably reduce unit cost of a good or service. Thus any innovation or improvement in technology may be accompanied by an increase in supply. This can be demonstrated in diagram 2. An improvement in technology may shift the supply curve from S to S2. Thus one can expect there to be an increase in quantity supplied by the market, that is, an increase from Q1 to Q2. However classical economics assumes that firms are run purely for profit and that the owners of firms will desire only more profit. This may not be so in real life. For example an improvement in technology could increase profitability thus allowing people to work less and thus reducing supply, from S to S2 in diagram 2, while maintaining similar levels of profit.
- Tax. An increase in tax, cooperate or indirect tax, will decrease supply. This can be seen in diagram 3.
- Profitability. If it is more profitable to produce a good or service then other goods and services which a firm may produce then that firm may increase supply in order to take advantage of higher profitability.
Supply can experience change in price elasticity of supply. This means that the gradient of the supply curve changes. Factors which may contribute to such a change are as follows:
- David Begg, Economics 7th edition, 2003 (ISBN 0-07-709947-8)
- Susan Grant, Chris Vidler, Economics in Context, 2000 (ISBN 0-435-33111-6)