Published by Patrick Mutisya · 14 days ago
Supply is the quantity of a good or service that producers are willing and able to sell at each possible price during a given period, ceteris paribus.
It is represented by the supply curve, which typically slopes upwards because higher prices provide an incentive for producers to increase output.
Mathematically, the supply relationship can be expressed as:
\$Q_s = f(P,\; \text{input prices},\; technology,\; expectations,\; number\;of\;sellers,\; taxes\;and\;subsidies)\$
An extension of supply occurs when the entire supply curve shifts to the right. At every price, a larger quantity is supplied.
A contraction of supply occurs when the supply curve shifts to the left. At every price, a smaller quantity is supplied.
The main determinants that cause the supply curve to shift are listed below. For each determinant we indicate whether it leads to an extension (right‑hand shift) or a contraction (left‑hand shift) of supply.
| Determinant | Extension of Supply (Right Shift) | Contraction of Supply (Left Shift) |
|---|---|---|
| Input prices | Decrease in the cost of raw materials, labour, or energy | Increase in the cost of inputs |
| Technology | Improvement in production techniques (e.g., automation) | Technological setbacks or obsolescence |
| Number of sellers | Entry of new firms into the market | Exit of firms from the market |
| Expectations of future price | Producers expect lower future prices → increase current output | Producers expect higher future prices → withhold current output |
| Taxes and subsidies | Introduction of a subsidy reduces marginal cost | Imposition of a tax raises marginal cost |
| Government regulation | Relaxation of licensing, fewer safety standards | Stricter environmental or safety regulations |
Input price fall: The price of wheat drops for a farmer producing bread. The farmer can now produce more loaves at the same cost, shifting the supply of bread to the right.
Technological improvement: A car manufacturer installs robotic assembly lines, increasing output per hour. The supply of cars expands (right shift).
Tax increase: The government raises a levy on cigarettes. Producers face higher costs, so the supply of cigarettes contracts (left shift).
Entry of new firms: Several new mobile‑phone manufacturers enter the market, increasing total industry supply and causing a rightward shift.
Expectation of higher future price: Oil producers anticipate a price rise next year, so they reduce current output to sell later at a higher price, contracting current supply.
It is crucial to differentiate a movement along the supply curve from a shift of the curve: