_Supply

Tags: #cb2/03/02

Things included in this section:

Three reasons why quantity supplied increases with price

Supply curve
Other determinants of supply
Movements along and shifts in the supply curve

Supply and price

As the price of a good rises, the quantity supplied will also rise

Reasons for the above relationship:

1. As firms supply more, they are likely to find that beyond a certain level of output,
costs rise more and more rapidly
For example,
Suppose you are a owner of a bakery shop, and you find that the prices of
chocolate cake are rising, so in response to this you will start making more
chocolate cakes.
But you can make at most 100 cakes in a day due to the limited ovens you
have
So if you want to produce more than 100 cakes (beyond a certain level of
output) then you have to buy more ovens which results in the rise of costs of
producing a chocolate cake rapidly
2. The higher the price of the good, the more profitable it become to produce more.
Firms will thus be encouraged to produce more of it by switching from producing less
profitable goods
For example,
Suppose a car company gets to know that the prices of SUV has increased,
then that car company will produce more SUVs than sedans in order to
become more profitable
3. If for a given time, the price of a good remains high then new producers will be
encouraged to set up in production. This results in rise in total market supply
For example,
Suppose the oil prices remains high for a given time, then it will become
more profitable for new companies to enter the oil production industry
Here the first two determinants affect supply in the short run. The third affects supply in the
long run.