A supply curve is a graphical representation of the law of supply. The law states a positive relationship between the quantity supplied and the own-price of the product. When its own price rises, the quantity supplied will increase. But, when prices fall, the quantity supplied decreases.
If you plot the relationship between quantity and price, it will form a supply curve with an upward (positive) slope.
Changes in its own price will cause the quantity supplied to move along the curve. But, if other factors (besides its own-price) change, it will shift the supply curve to the right or left.
The chart below will show you the difference between the two.
Why is the supply curve upward sloping
The law of diminishing marginal returns explains why the curve is upward sloping.
In the production process, producers use variable inputs (for example, labor) and fixed inputs (production machines). Initially, the addition of work produced significant gains. The marginal product of new workers is positive. In a sense, the addition of labor produces more additional output.
But, when the machine is near its full capacity, the marginal product of workers goes down. Producers can’t increase output higher above its full capacity.
In stimulating production, the product’s price must be higher. That way, producers earn more money, which they can use to buy new machines.
Shifting supply curves
Changes in the price of an item cause the quantity to change, but still along the curve line. The curve shift occurs if there is a change in factors outside its own-price
Let’s mention the factors:
- Input price
- Production technology
- Government subsidy and tax
- Producers’ expectations
- Number of producers
- Input availability
Businesses look for profit. They will increase production until marginal costs equal marginal revenue, which is their maximum profit point. While product prices affect marginal revenue, marginal costs depend on input prices.
Producers will increase their production as long as marginal costs are lower than marginal revenue. For this reason, producers won’t increase output if input prices rise because of bearing higher marginal costs.
Technology influences productivity by increasing hourly output. More sophisticated technology allows workers to produce more output. Hence, more advanced technology contributes to increasing supply and shifting the curve to the right.
Government subsidies and taxes
Subsidies and taxes affect production costs. Lower business taxes reduce production costs, thereby increasing supply.
The effect of subsidies is the opposite of tax. Higher subsidies reduce production costs, thereby increasing supply.
Expectations also affect how many products producers want and can sell. For example, a company hears that its competitors will launch more advanced products. The company then decides to produce and sell its products to the store before competing products come out.
Number of producers
Its relationship with the supply is obvious. The supply of goods increases if more producers operate in the market. New players bring new capacity and output.
But remember, this factor only applies to market offers, not individual offers.
If inputs are unavailable, it causes the production process to be interrupted, even stopped. The reason might be supply chain disruption because of bad weather or natural disasters.
Inputs arrive late into manufacturing. It could cause the production process to stop unless producers have an inventory of inputs in their warehouse.