Definition: In economics, “Supply” implies the quantity (how much) of a commodity that the producers, manufacturers or sellers are willing and able to offer to the market at different prices during a particular period of time.
Basically, supply is something that the firm offers for sale, to the target audience in the market, which may not be something that the firm succeeds in selling, because everything that is offered is for sale, may not get sold.
Individual Supply connotes the quantity of a good or service which an individual organization is willing and able to produce and offer for sale.
An individual supply schedule is an indicator of various quantities of a product offered for sale by a producer at different prices.
Market Supply implies how much of a commodity, all the producers in the market are willing and able to produce and offer for sale is called market supply.
Market supply schedule reflects the different quantities of a product that all the firms in the market are ready to supply at set market price, during a particular period of time.
Determinants of Supply
- Price of a good: Other things remain constant when the relative price of a commodity is high, it is supplied in great quantity, as firm produces the commodity to earn profit and the profit of the firm increases with an increase in its price.
- Price of related goods: When the price of other goods, i.e. competing or complementary goods rise, it becomes comparatively profitable to the firm to produce and offer the other good than the good in question. For instance: A farmer produces two crops tea and coffee and if the price of tea increases, then in such a situation, it will be more profitable for the farmer to produce more tea. Therefore, the farmer may shift his resources from the coffee production to that of tea. In this way, the supply of tea may increase and coffee will fall.
- Price of inputs: The price of factors of production (inputs), i.e. land, labor, capital, entrepreneur also affects the supply of the commodity, in a way that if there is an increase in the price of a factor of production, then the cost of producing a commodity which uses that particular factor in excess will be more in comparison to the commodity, which uses the same factor in less quantity.
- State of the art technology: Innovations in the product, usually make the product better than before, and also better than its competitors, with the limited resources which the company possess. Thus the company will increase the supply of the products with state of the art technology and reduce the supply of the product which is displaced.
- Taxes and subsidies: Goods and services tax is levied on goods, which increases the overall cost of production and so the supply of the commodity will increase only when the price of the commodity rises. Conversely, government subsidies usually decrease the cost of production and hence it is beneficial to the firm to increase the supply of goods.
- Nature of competition: When there is a cut-throat competition between firms in the market, the firm wants to increase their share to the maximum, for which they supply more of the commodity. Further, when there is a new entry to the industry, it also increases the supply of the existing goods in the market.
- Firm’s business objective: The primary objective of the firm, i.e. profit maximization or sales maximization or the combination of the two, also influence the market supply of the commodity. So, when the firm wants to increase the profit, it will decrease the supply of the commodity, which can help the firm in increasing the price when there is a high demand for it. In contrast, when the firm wants to increase its sales, it will simply raise the supply.
Apart from the given factors, there are other factors like natural factors especially in the case of agricultural products, which influences the supply. Further, the future expectation of the products about the price rise/fall may also influence the supply of the commodity in the market.