What’s it: Individual supply refers to the number of goods a firm is willing and able to produce at a given price, ceteris paribus. It only represents supply from one producer. When you combine all the firms’ production in the market, we call it the market supply.
Individual supply curve
The individual supply curve tells you how many products the company will be willing to produce and sell at a given price. It has an upward slope (negative slope). It shows you the price and quantity willing to supply has a positive correlation.
I will take a simple example to illustrate the curve.
Say, a producer is willing to produce output for the price of a product as follows:
|Quantity supplied (units)||Price ($)|
From this data, you can see, the company will produce as many as 3 units if the price is at $1. Then, the firm increases it to 6 units if the price equals $2, and so on.
Suppose you plot the relationship between the quantity the firm is willing to supply and the price. In that case, it will form an upward slope (positive slope) of the supply curve, as shown below:
Why is the individual supply curve sloping upward?
The curve’s upward slope shows a positive relationship between price and the quantity a firm is willing to supply. If the price is higher, the firm is willing to supply more goods. Assuming input costs and other factors are constant, rising prices increase profits. That incentivizes the firm to produce more output.
Conversely, if prices fall, firms are only willing to supply less. Lower prices reduce profitability.
Determinants of individual supply
Economists use the price of goods as the primary determining factor for a producer supply—changes in the price of a good cause its supply to change along the supply curve line.
When the price goes up, they get a higher profit because they can sell at a higher price. They respond by increasing the output to get more profit, ceteris paribus. The opposite effect applies when prices go down, as I mentioned earlier.
Conversely, changes in other factors (besides its own-price) also affect producers’ willingness to supply goods. Usually, they affect the price of the input, which in turn affects the profit.
However, these changes do not cause the output to move along the curve but instead shift the curve. When the curve shifts to the right, assuming constant prices, it shows producers are willing to supply more of the good. Conversely, a shift to the left indicates that producers are willing to supply fewer goods.
Here are the affecting factors for the individual supply and shift its curve to the right:
- A decrease in the price of inputs, such as raw materials, energy, and wages. That lowers production costs and increases profit per unit. Therefore, the company will try to increase sales by increasing production.
- Advances in production technology. It can make the company produce more output by using the same quantity of input. Thus, even though output increases, input costs remain.
- Lower future price expectations. Lower prices mean fewer profits in the future. Therefore, producers will try to increase their current sales to get a higher profit before prices fall.
- Cut corporate tax. Companies save more money by paying less in taxes. That incentivizes them to increase production.
- Increase in production subsidies. That lowers company costs and encourages them to be willing to produce more.
If the factors move in reverse, it reduces supply and shifts the curve to the left. Specifically, the individual supply curve will shift to the left if:
- Lower prices
- Technological regress, for example, is due to natural disasters
- Higher future price expectations
- Tax increases
- Cut production subsidies