Supply (economics) facts for kids
In economics, supply is how much of something businesses, workers, or other sellers are ready and able to offer for sale. This "something" can be products, work time, raw materials, or anything valuable.
Supply is often shown on a graph called a supply curve. On this graph, the price of an item is on the up-and-down line (vertical axis), and the amount available is on the side-to-side line (horizontal axis). This might seem backward, but it's how economists usually draw it!
The supply curve can show what one seller offers or what all sellers in the market offer together. The amount supplied is usually for a specific time, like how many tons of steel a company can make in a year.
In the goods market, supply is the amount of a product that producers want to sell at different prices. This is true when other things stay the same. In the labor market, the supply of labor is how much time people are willing to work, depending on the wage rate (how much they get paid).
In financial markets, the money supply is the amount of easily available money in the market. A country's central bank usually controls this. There are different types of money supply. For example, "M1" includes coins, cash, and money that can quickly become cash. "M2" includes M1 plus short-term savings and some other funds.
Contents
What is a Supply Schedule?
A supply schedule is like a table. It shows how much one or more businesses are willing to sell at different prices under current conditions. Some important things that affect supply are the item's own price, the prices of related items, how much it costs to make things, technology, and what sellers expect for the future.
Things That Change Supply
Many things can affect how much a seller wants to or can produce and sell. Here are some common ones:
- The Item's Own Price: The main idea of supply is about the price of an item and how much is offered. The law of supply says that if the price goes up, the amount supplied also goes up, as long as other things don't change.
- Prices of Related Items: Related items can be things used to make the main product. For example, if the price of pigs goes up, the supply of pork products like Spam might go down. This is because it costs more to make them. A related item can also be something else a company could make with its current tools. If a company makes leather belts but finds that phone pouches are more profitable, they might make fewer belts and more pouches. Also, if the price of a joint product changes (like beef and leather from the same animal), it affects supply. If beef prices go up, more cattle are processed, which means more leather is available.
- How Things Are Made: Technology is a big factor here. If there's a new invention that makes production better, the supply of that item increases. Other things, like weather for farm products, can also affect how much is produced.
- Expectations: What sellers think about future market conditions can directly change supply. If a seller believes that demand for their product will greatly increase soon, they might make more of it right away. They do this to get ready for higher prices later.
- Price of Inputs: Inputs are things like land, labor, energy, and raw materials needed to make a product. If the price of these inputs goes up, sellers might offer less of their product because it costs more to make. For example, if electricity prices increase, a seller might reduce their supply.
- Number of Sellers: The total market supply is the sum of what all individual sellers offer. If more businesses start selling a product, the total market supply will increase, which can lead to lower prices.
- Government Rules: Government actions can really affect supply. This includes rules about the environment, health, work hours, wages, taxes, and even where businesses can be built.
This list isn't everything. Any fact or situation that affects a seller's willingness or ability to make and sell goods can change supply. For example, if snow is predicted, stores will stock more sleds, skis, winter clothes, or even bread and milk.
When the Law of Supply Doesn't Quite Fit
Sometimes, the usual rule of supply (higher price means more supply) doesn't perfectly apply:
- Farm Products / Perishable Goods: Because these items spoil quickly, large amounts are often sold right after harvest, even if prices are low. During dry seasons or planting times, it's the opposite.
- Items Made in Fixed Amounts: Some products depend on specific machines. In these cases, the same amount might be offered no matter the price.
- Supply of Labor: For example, people in very high-level jobs might earn a lot but work fewer hours. Other staff might earn less but work longer hours.
How Supply Changes: Movements vs. Shifts
Imagine the supply curve on a graph.
- A movement along the curve happens only when the amount supplied changes because the item's *own price* changes.
- A shift in the supply curve (meaning a change in supply) happens when something *other than the price* of the item changes. For example, if the cost of an ingredient used to make the product goes up, the entire supply curve would shift to the left, meaning less is supplied at every price.
The Market Supply Curve
The market supply curve is found by adding up the supply curves of all the individual businesses.
Shape of the Market Supply Curve
The law of supply generally says that if nothing else changes, a higher price for a good means more of it will be supplied. This means the supply curve usually slopes upwards. However, there are some exceptions where the supply curve might not slope upwards.
Some economists argue that for mass-produced goods, the supply curve can actually slope downwards. This means as more is produced, the cost per item goes down, and if demand is very low, unit prices go up. This is related to economies of scale, where making more of something can make each unit cheaper.
Elasticity
The price elasticity of supply (PES) measures how much the amount supplied changes when the price changes. It's like asking: "If the price goes up by 1%, how much more or less will be supplied?" Since supply usually increases with price, PES is usually a positive number. For example, if the PES for a good is 0.67, a 1% rise in price will cause a two-thirds increase in the amount supplied.
Important things that affect PES include:
- How Complex Production Is: Simple products like textiles (cloth) are easy to make more of quickly, so their PES is high (elastic). Complex products like cars need special equipment and skilled workers, so their PES is low (inelastic).
- Time to Respond: The more time a producer has to react to price changes, the more elastic the supply. A farmer can't instantly grow more soybeans if the price goes up.
- Extra Capacity: If a producer has unused factory space or machines, they can quickly make more products when prices change.
- Inventories: If a producer has a lot of products already made or storage space, they can quickly respond to price changes.
Other types of elasticity can be calculated for things that aren't the price. For example, how much the supply of cookies changes if the price of sugar goes up by 1% is an "input elasticity of supply."
Market Structure and Supply
In a perfectly competitive market, many sellers offer the same product, and no single seller can control the price. In this situation, a business can easily tell how much it will supply at any price by looking at its production costs.
However, for a monopoly (where only one company sells a product), there isn't a simple "supply curve." A monopolist chooses both the price and the quantity to sell at the same time, based on what customers are willing to buy. If demand changes, the price might change without the amount supplied changing, or the amount supplied might change without the price changing, or both. There isn't a simple one-to-one link between price and the amount supplied for a monopoly.
See also
- Demand curve
- Law of supply
- Profit maximization
- Aggregate supply
- AD-AS model
Images for kids
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An example of a nonlinear supply curve
See also
In Spanish: Oferta para niños
