Definition of Supply Curve
The supply curve shows the relationship between price and quantity supplied. As price increases, suppliers offer more units for sale because each unit can be sold at a higher selling price. The higher selling prices are offset by the increased costs associated with making additional goods available to buyers or consumers. For example, assume that you are a supplier of widgets. You can sell each widget at a price of 10 dollars each. When you raise the price to11 dollars, then customers may demand that you produce more units before they buy from you.
Law of Supply
Before proceeding with the supply curve, a little grounding is needed on the law of supply. The Law of Supply is a basic theory in Economics that lays down that price increase would necessarily lead to the supplied quantity of goods or services when all factors remain constant. The supply curve slopes upward. It graphically represents the Law of Supply. Suppliers will increase production with an increase in prices, and the same is depicted in the upward curve.
For individual suppliers, aggregate supply is determined by the supply curve. A supply schedule can be framed for this purpose. The schedule would go on to show that at a particular price point, there is a corresponding quantity supplied. When all individual quantities are plotted, it makes up for an aggregate supply curve.
Determinants of Supply Curve
Price of Input
Input price has a major bearing on the supply curve. The costs of input are also known as 'Factors of Production’. Such input includes materials, labour, machinery used for the production of services and goods. The costs can be further divided into explicit and implicit costs. Explicit costs would include the price of labour and material, while implicit costs would comprise interest, rent, etc. While the former is paid out of pocket, the latter is considered to be an opportunity cost.
Technology
Technology has a direct impact on production costs as innovation is likely to cause higher productivity as well as cut down existing costs. Wasteful expenditure can also be conserved. All these will help to decrease input costs. However, the converse may also take place with technological decay. The efficiency of production, in that case, would come down. Hence, technology improvement will cause an increase in supply, and technology decay will cause a decrease in supply.
Number of Producers
A greater number of producers automatically increases the supply. When a greater number of firms enter the market, there is an increase in supply. On the other hand, when a number of firms leave the market, there will be a decrease in supply. One should note that the entry of new firms would alter the demand schedule in the market. This may either put pressure on existing firms or affect their operations, thus causing a decrease in supply.
Expectations
Production decisions are significantly affected by the expectations of supply price. Production would only be enhanced by firms when there is a reasonable expectation of a higher market price. Such expectation is generated based on certain credible evidence. Hence, if there is an expectation of a price rise, there will be an increase in supply. On the contrary, if there is an expectation of price fall, there will be a decrease in supply.
Movement along the Supply Curve
The supply curve in Economics also exhibits movement along the curve. Movement along the supply curve is the graphical representation of alterations in goods or services supply on account of its price when all other factors remain constant. If there is a price change, supply also changes. The movement will be from one point to another point on the same supply curve. Movement can be both rightward and leftward.
Rightward Movement
The above figure shows that with price rise, more revenue is generated per unit if all other factors remain constant. Hence, to earn more profit, firms will supply more. This is termed as expansion in supply.
Leftward Movement
The above graphical representation also shows that with a fall in price, firms tend to make less revenue, which automatically contracts supply. In this case, movement becomes evident by movement from a right side point to that of a left side point on the given supply curve.
Supply Curve Shift
The shift in the supply curve will take place with the change of any of the determinants. For instance, with a change in costs, the supply curve will shift the position. With a rise in cost, production becomes less at a given price — the supply curve shifts to the left. The decrease in costs means that there can be more productivity, which will result in a right-side shift in the supply curve.
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Conclusion
The conclusion of the article is that an increase in supply is likely to be seen with technological innovation, entry of new firms, and expectation of price rise. Meanwhile, a decrease in supply can be witnessed due to technological decay, the exit of existing firms, and the expectation of price fall. There are many factors that affect the production and hence, supply. Hence, a change in any of the determinants may result in a shift in the supply curve. One should ensure to adopt these methods to increase supply.
Cut down existing costs. Wasteful expenditure can also be conserved. All these will help to reduce the cost of production.
Make efforts to expand technology or technology used in production. This will increase supply by expanding productive capacity.
Seek to improve the quality and quantity of input employed for production, if not already done so. Improvements in these factors will result in increased output and hence, supply.
Ensure that there is a level of investment in production. Without any investments, supply cannot be increased. All these changes will aid to increase supply and hence, prove profitable for one's business.
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FAQs on Supply Curve
1. How is the Supply Curve Determined?
The supply curve is derived from the study of data on input costs and the quantity of output produced for a number of technical conditions. So, no single person can decide this demand curve by himself or herself. It has to be studied through thorough research based on multiple parameters. The research and parameters include all the costs associated with production, market conditions and other influencing factors. The demand curve is then drawn after studying all these elements. These elements or assumptions are general in nature, which means they may or may not hold true for all types of businesses. However, the curve is very accurate when we talk about the technology industries and production processes. To know more about this topic, download the Vedantu app now!
2. When Will the Supply Curve Shift Right?
The supply curve will shift right when there is an increase in production capabilities. For instance, if a firm makes use of new machines or technology to power its production line, then the output tends to improve, and more quantity can be supplied at a given price. All such changes will result in a right-side shift in the supply curve. This shift will result in a rise in the equilibrium price. You can determine more about this topic from our experts at Vedantu. They possess extensive knowledge of the subject and can provide you with all the details that you would require in a simplified manner.
3. How Would You Distinguish Between Shift Factors and Change Factors?
An increase in supply is likely to be witnessed due to factors such as technological innovation and the entry of new firms. This will result in a right-side shift in the supply curve. On the other hand, a decrease in supply can be seen when technological decay and exit of existing firms takes place. All these changes will affect the production and hence, supply, which can be illustrated in a shift of supply curve. You must know more about change and shift factors from our experts at Vedantu.
4. How Is the Supply Curve Shifted by Technological Advancement?
The supply curve will be shifted to the right by technological advancement. The right-side shift in the supply curve is caused due to an improvement in technology, which leads to a rise in the production of output. For instance, if a firm starts using a new type of power or a machine for production purposes, then more quantity can be supplied at the same price. As a result, the equilibrium price will rise. All these changes which lead to an up-shift in the supply curve can be explained better by our experts at Vedantu. They provide in-depth information on this topic and can guide you through it.
5. How Is the Supply Curve Shifted by Administrative Decisions?
A shift in the supply curve can also be seen when there is a change in the administrative decisions of the firm. For instance, if a firm decides to lower prices due to negative demand, then it will lead to an increase in sales and, consequently, a right-side shift in the supply curve. All such changes can be explained better by our experts at Vedantu who provide interesting information on Economics and also offer guidance for students appearing for competitive exams. If you want to know more about the supply curve from them, get in touch with us now.
6. What Causes the Supply Curve to Shift Left?
There is a range of different factors that cause a supply curve to shift either left or left. Those factors include – (1) number of sellers, (2) prices of other goods, (3) prices of input (4) technology, (5) expectations about prices.
The left-ward shift of the supply curve is caused by two factors – expectations and prices of input. If there is an expectation on the part of sellers for prices to increase, the supplied quantity of goods may be decreased to be able to supply more at an increased price.
Furthermore, with an increase in resource costs, sellers will be disinclined to supply the same quantity on a particular price. With the supply constraint, the supply curve would again shift to the left.
7. What is Measured by a Supply Curve?
The main components elucidated in the supply curve are the cost of services or goods and the supplied quantity over a period of time. It is a graphical representation of the direct correlation between the cost of particular services or goods the quantity.
In the graph, the cost price is indicated over the vertical y-axis and the supplied quantity represented against horizontal x-axis. The curve may be subject to a shift in right or left, depending on the alteration of contributing factors.
8. What is Meant by the Law of Supply?
The Law of Supply postulates that with all other factors remaining constant, if the price of a service or product increases, the quantity of the services or goods supplied would also increase accordingly. The same phenomenon can be observed with price decrease as well.
The underlying point to this theory is that suppliers would always want to do maximisation of profits by offering greater quantity at a higher sale price. It is due to the fact that businesses can generate higher revenue at a higher price by producing more.
