Supply Curve

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What is a Supply Curve?

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The supply curve is a graphical representation of the product price and quantity of product that a seller or a producer is able and willing to supply. In the graph, the vertical axis represents the price while the horizontal axis represents the quantity

The supply curve follows the law of supply where an increase in price leads to an increase in quantity supplied by the producers when all other factors remain the same. In such graphical representations, price is an independent variable while quantity is a dependent variable. The independent variable is usually shown on the x-axis, but economics does not obey this rule.

As we know that the law of supply depends on some conditions. In order to satisfy the law of supply, therefore, the supply curve also maintains some ceteris paribus (other things equal) conditions remaining constant. These conditions include the technological state, other sellers in the market, the seller’s expectation of price, the level of production cost, etc. A change in any of these factors will result in a shift of the curve to either right or left as illustrated below.

When a factor other than price and quantity changes, the curve may shift to the left or right. For example, let’s consider an automobile manufacturer that relies on assembling the parts in one of its factories. If the technological state is updated where more assemblies can be completed within the given amount of time the number of automobiles manufactured will increase. So, the curve will shift to the right.

Other factors may let the supply curve shift in other directions as well. If the prices of spare parts increase the curve will shift to the left. When the price of a substitute (say sedans when the current manufacturing capacities are of SUVs) increases substantially, the production of the SUVs will decrease and the curve will shift to the left.

If the area of the production factory is expanded and more employees are recruited to assemble the parts, the supply of SUVs will increase and the curve will shift to the right. Moreover, when the future price of SUVs is expected to rise, production will decrease for a while because there will be an incentive to wait, and in such a case, the curve will shift to the left.

Supply Elasticity

If the price of SUVs rises, the manufacturer of SUVs will have an incentive in the production of SUVs and the supply of SUVs will rise. The amount to which rising prices lead to rising quantity is known as price elasticity. If a 10% rise in SUV prices leads to a 10% rise in manufacturing, then the supply elasticity of SUVs is 1

On the other hand, if a 10% increase in SUV prices leads to a 20% rise in the manufacturing of SUVs, then the price elasticity of SUVs will be 2, and so on.

What is the Law of Supply?

The law of supply is a law that connects supply and prices. It states that when all other factors are kept constant, the relation between price and supply is proportional. Therefore, the law of supply is a law that determines the ideal relation between supplies and prices of commodities.

The law of supply states that if there is an increase in the price of goods in the market, the producers will naturally increase the supply of the goods to earn more profits. In simpler words, when the price of an item paid by consumers goes up in the market, the suppliers increase the availability of that item in the market.

The law of supply shows the nature of the producers or suppliers in relation to the price of the item produced and made available in the market. When there is an increase in prices in the market of any item, the suppliers look for more profit by increasing the supply of that item in the market.

It is notable that the supply curve is the curve of the law of supply. It shows the relationship between rising prices and the supply of a commodity in the markets. As supply increases when the price goes up, the graph obtained is an upward-sloping curve that represents the prices and supplies of a commodity.

Types of Supply Curves

Short-Run Supply Curve

To get a short-run supply curve, the following conditions must be met first −

  • A specific product, service, or commodity must be chosen.

  • A unit must be set for measuring the quantity of the commodity.

  • A unit for measuring the price must be set.

  • A convention must be set on whether a sales tax has been applied to the stated price.

  • A certain firm or firms must be chosen that specialize in producing the commodity.

  • The fixed costs incurred by the firm must be noted which cannot be changed in the short run.

  • An economic backdrop containing all other determinants of supply except the unit price must be chosen.

Now, having these points fulfilled, if we draw a supply curve, it will be a short-run supply curve.

Long-Run Supply Curve

In the long-run supply curve, all the inputs required are variable. Therefore, all expenditures, including property, plant, and machinery are variable. The producers of commodities in the case of the long-run curve are not fixed. Thus, if there is a profit, new entrants will enter the market while some firms will move out of the market if there is a loss.

In the long-run supply curve, there is no economic profit meaning that there will only be an ordinary profit. Therefore, the long-run supply curve is always more elastic than the short-run supply curve because, in the long run, the firms make no economic profit.

Conclusion

A supply curve is an important tool for economists to derive the supply and price needs of a commodity in the market using the law of supply. The supply of a product usually goes up when the price increases, and so the supply curve shifts to the right when there is an increase in supply. Therefore, looking at the graph, one can realize if there is more demand for a commodity in the market. Thereby, it can be said that the supply curve also denotes increasing demand in the market that is intended to be satisfied by more supply from the end of the suppliers.

The supply curve is also helpful in determining the increasing production of a commodity. As the quantity part of the graph shows the amount of commodity required to equate to the price rise in the market, one can get an idea of the required amount of commodity needed in the market by using the supply curve. Therefore, the supply curve is an indispensable tool for economists to identify trends in the market.

FAQs

Qns 1. Between long run and short run supply curves, which is more elastic?

Ans. The long-run supply curve is always more elastic than the short-run supply curve.

Qns 2. What is the complement of the supply curve? What does it state?

Ans. The complement of the supply curve is the demand curve. It states that, when all other factors are kept constant, the higher the prices of a commodity, the less will be the demand for the commodity in the market.

Qns 3. Is the regulatory and taxation environment a factor when we consider the supply curve?

Ans. Yes. Taxation and regulatory environment do affect the supply curve formation.

raja
Updated on 13-Oct-2022 11:19:47

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