Supply in Economics: Definition & Factors

Supply in Economics: Definition & Factors
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  • 0:02 What Is Supply?
  • 0:45 The Supply Curve
  • 2:17 Quantity Supplied
  • 3:22 Shifts in Supply
  • 5:25 Lesson Summary
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Lesson Transcript
Instructor: Kallie Wells
You will be introduced to one of the main concepts in economics: supply. Have you ever considered how a producer determines how much of a product to supply? Learn what factors change the supply and how suppliers react to changes in market price.

What Is Supply?

In economics, we have two forces: the producer, who makes things, and the consumer, who buys them. Supply is the producer's willingness and ability to supply a given good at various price points, holding all else constant. An increase in price will increase producers' revenues, so they'll be willing to supply more; a decrease in price will reduce revenues, and so producers will supply less.

Supply's counterpart is demand; it measures how many consumers will want to buy a product at various price points. The direct relationship between price and quantity supplied of a good is known as the Law of Supply and is typically represented by an upward sloping line known as the supply curve.

The Supply Curve

The supply curve shows the quantity supplied of a given product at varying price points, holding all else constant. Here's a graph of the supply curve:

Supply Curve

You'll notice that the x-axis is labeled 'Q', and the y-axis is labeled 'P.' Those stand for quantity and price. Just like we saw earlier, when the price of a good goes up, the supply does as well. Each producer has his or her own supply curve for a given product, which can vary from one producer to another. The exact curve depends on production costs and other variables.

Let's look at an example. Imagine two wineries in the Paso Robles region: Paso Winery and Robles Winery. Paso Winery may be willing to supply 20 bottles of their wine if the market price were $10 per bottle, but willing to supply 100 bottles if the price were $50 per bottle. Robles Winery may only be willing to supply 5 bottles if the price were $20 each and 50 bottles at a price of $50 each.

The summation of the two individual supply curves creates a market supply curve, with red wine ranging from $10 a bottle up to $50 a bottle. The two individual supply curves differ because the wineries are willing and able to supply red wine at different prices. This may be due to varying input costs. Those are the costs associated with producing the wine, such as the variety of grape being used, labor costs, or technique of fermenting the grapes.

Quantity Supplied

The quantity supplied is the amount of a good that would be supplied to the market at a given price. In other words, it's the quantity that appears when we check the supply curve at a specific price point. For Paso or Robles wineries, the quantity supplied at a given price is how much wine they'd be willing to make if they knew they could charge that price.

Chart of Red Wine Supply
supply of red wine

Here's a chart showing the supply of red wine in the Paso Robles area. For example, point A shows a market price for red wine at $30 a bottle. At this price, winemakers would supply 60 bottles of red wine. If the price were to drop to $10 per bottle, which is marked at point B, then only 20 bottles would be supplied. And at $70/bottle, marked by point C, 140 bottles of red wine would be supplied. The change in quantity supplied of red wine is a result of a change in market price. Moving from point A to B or C is a movement along the supply curve. Only the market price for red wine changed, not the actual supply curve.

Shifts in Supply

Whenever we discussed a change in quantity supplied above, it assumed we were holding all else constant. What happens if the other factors, such as grape availability, are not held constant? It could result in a shift in supply, where the availability of the wine at any price is changed.

Paso Robles Supply Curve
Paso Robles Supply Curve

Let's check out the Paso Robles supply curve again. Point A on the curve says that during a typical year, 80 bottles of wine would be supplied with a market price of $40/bottle. Of course, not all years are typical. Wine production depends heavily on climate for the supply of grapes, so changes in climate can affect the supply of wine.

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