Changes in Supply by Omkar Abhyankar

 In this article we will explore how the entire supply for a good can change. First let’s start by reviewing the difference between the quantity supplied and supply. Quantity supplied is the amount of a good or service supplied at one specific price. Supply is the amount of a good or service supplied at many different prices. In other words, supply models a spectrum of how the quantity of a good or service supplied changes at various prices while the quantity supplied of a good or service only models the amount supplied at one specific price. We know that the quantity supplied changes when the price changes. Could the entire supply for a good or service in the market change? The answer is absolutely. There are many factors which could cause a change in the entire supply of a good or service. A useful acronym to remember is T.R.I.C.E. Each letter in this acronym represents a factor which can cause the supply to increase or decrease. T stands for technology, R stands for related prices, I stands for input prices, C stands for competition, and E stands for expectations. Let’s observe each factor more closely:

T -- Technology:

An improvement in technology can foster production levels and as a result, the supply of the good or service would increase. If technology malfunctions, or breaks, then production levels would decrease and as a result, the supply for the good or service would decrease.

R -- Related Prices:

This factor takes into account the effects of related goods. There are two types of relationships which goods can have while being produced. They can either be complementary goods or substitute goods. It is important to note that complementary and substitute goods hold a different meaning when discussing the production of goods as opposed to discussing the consumption of goods. A complementary good (when discussing the production of goods) is when two goods are produced simultaneously. Sometimes extra goods are produced as a consequence of producing a good. These extra goods produced are called complementary goods.  If a good causes the production of many complementary goods, then the supply of that good would increase since they would receive the benefits from both the original and the complementary goods. A substitute good is a good which can be made in place of another good. A substitute good can be thought of as an alternative production option for a producer. If the price of some Good A increases over another Good B, then the suppliers would supply more of Good A since supplying more of Good A would allow the firm to obtain greater benefits. On the other hand, if the price of Good B increased relative to Good A, then the suppliers would decrease the supply of Good A and increase the supply of Good B since selling more of Good B would increase the firm's benefits.

I -- Input Prices:

Input prices are the costs required in producing a good. If input prices of a good increases, meaning the costs of producing that good increases, then the producers would decrease the supply of that good. If input prices for a good decreases, meaning the cost of producing that good decreases, then the producers would supply more of that good to receive greater benefits.

C -- Competition:

Competition is a fundamental aspect of a competitive market. The more firms present in the competitive market, the more competition there is.  If a market becomes more competitive meaning more firms join the market, then supply of the good being sold in the market would increase since more firms would supply the good. Conversely, if a market becomes less competitive, meaning firms leave the market, then the production of the goods being produced in the market would decrease since there are less producers, causing the supply to decrease.

E -- Expectations:

A producer can predict the prices of certain goods based on the current situation of a market. If a producer expects the prices to increase for a good in the future, then they would supply less of that good right now and supply more of the good in the future as they would earn a greater profit from selling in the future as opposed to selling right now. Therefore, the current supply of the good would decrease. Conversely, if the price of a good in the future is expected to decrease, then the producer would supply more of the good right now since the current higher prices allow greater profits for the producer. Therefore, the supply of that good would increase.

Now, let’s take a graphical look at how the supply curve shifts in order to model an increase or a decrease in the supply of a good or service. First let’s look how an increase in supply is modeled:

In this graph, S0 represents the initial supply curve while S1 represents the supply curve after supply has increased. We can observe that the supply curve shifted to the right. The reason for this is because supply increases when suppliers are willing to supply more quantities of their good or service at the same price. As a result, at each point in the initial supply curve, the quantity supplied increases, essentially creating a new supply curve represented by S1, which is shifted to the right. 

Now let’s look at how an decrease in supply is modeled:

In this graph, S0 represents the initial supply curve while S1 represents the supply curve after supply has decreased. We can observe that the supply curve shifted to the left. The reason for this is because supply decreases when suppliers are willing to supply less quantities of their good or service at the same price. As a result, at each point in the initial supply curve, the quantity supplied decreases, essentially creating a new supply curve represented by S1, which is shifted to the left. In the next article we will combine both the concepts of supply and demand and introduce a new concept known as “equilibrium”.