Make your own free website on Tripod.com
Ismail Hassan
The Distinction Between Changes in Quantity Supplied and Changes in Supply

Home

It is important to be able to differentiate between supply, change in supply, quantity supplied, and change in quantity supplied.

Supply -- Supply for a good or service results from the willingness and ability of producers (or suppliers or firms) to produce the good or service.  Both conditions of willingness and ability must coexist before the good or service has a supply.  Willingness is the readiness of producers to supply the good or service and is based on the profit potential of the good or service.  Ability is the capability of producers to produce the good or service they wish to buy.  We are only able to construct the supply schedule, and subsequently the supply curve, of good or service that has a supply.  For goods or services without supply, that is goods or services that producers are unwilling and/or unable to buy, there is no supply schedule or supply curve.  For instance, there is a supply for pencils on campus.  Why? Because producers are willing and able to produce them. Producing pencils makes sense because there is a demand for them and this leads profit potential that attract producers to supply. And since there is supply for pencils, we will be able to construct a supply schedule as well as a supply curve for pencils.  Is there a supply for Ferraris on campus?  Chances are, there isn't any.  Why?  Because Ferraris are very expensive, and I doubt very much if people are willing to pay for it.  As a matter of fact, I don't think anyone can afford to pay for one! [ceteris paribus].  And since there is no demand for this beautiful sports car, suppliers are unwilling to supply them.  With no supply, there is no supply schedule, and no supply curve. 

Price plays an important factor in determining whether or not there is supply for a particular product.  Price will determine if producers can make profits from the goods or services they produce. If the price is too low to the point that firms are making small profits or no profits at all, they may decide not to produce. They will study prices and examine their production costs and decide accordingly whether or not it is worth the effort to supply. It is important to remember that firms supply decisions are not for fun or charity but for profits. 

Change in Supply -- Once a good or service has a supply, several factors or conditions can cause the supply to change.  A change in supply means there is an increase or decrease in supply. [Do not confuse change in supply with change in quantity supplied -- Change in quantity supplied is explained below].  There must first be supply before change in supply.  So for goods or services without supply (like the Ferrari example above), there is no change in supply unless and until supply exists first. 

A change in supply will cause the supply curve to shift either to the right or to the left of its original position.  A shift to the right shows an increase in supply and a shift to the left shows a decrease in supply.  What causes supply to change?  There are several factors.  Lets examine production costs first. To produce goods or services, firms will need the necessary factors of production, and these factors are not free. Firms need to pay for them and later put more money in the production process before goods are ready for sale. The cost of producing is an important factor in determining whether or not firms make profits. If cost is high while revenue from sales is low, it will hurt profits a situation that makes firms unwilling to produce. Therefore we can conclude that production costs is a factor that determine supply. Production costs, or rather changes in production costs, can cause changes in supply (shifting the supply curve either to the left or right of its original position). Lets take the bread producer Gardenia as an example. To produce bread, Gardenia buys flour from another supplier. For simplicity, lets assume that everyday Gardenia buys and uses 100 kilograms of flour at RM1.50 a kilogram to produce 2000 loaves of bread. What will happen if the price of flour is increased, say to RM3.00 per kilogram? Gardenia will reduce the purchase of flour (remember the law or demand?) and this will subsequently cause reduction in the supply of bread. In this example, the supply curve for bread will shift to the left of its original position. What do you think will happen when the price of flour is reduced from RM1.50 to RM1.00 per kilogram? There are many factors affecting cost of production apart from the cost of obtaining factors of production. These factors are discussed in detail under the topic Costs of Production.

Technological advances is another factor that can result in changes to supply. The use of modern technology can give firms the advantage of producing more using the same amount of inputs (or sometimes less). They can still maintain the same production cost (sometimes lower) while producing more and subsequently earn more profits. Lets take an old vegetable farmer, Tan, who plants tomatoes on his one acre of land as an example. Tan tills the land with only the aid of an old hoe and it takes him one whole month to prepare the land for planting. Once the land is prepared, he will laboriously and manually plant the tomato seedlings and this takes another 2 weeks. During the next three months Tan will do the watering, fertilizing, and weeding manually before the tomatoes are ready for harvest. Harvesting is also done manually. After about 5 months of backbreaking work, Tan is able to supply about 300 kilograms of tomatoes from his one acre of land. Tans son, Alex, a recent graduate of an agricultural college, decides to take over his aging fathers job. The first thing Alex did when he took over was to buy a new farm tractor that has several special functions. With the new equipment, it takes merely half a day to plow the land and prepare it for planting. With a special implement fixed to the tractor, it takes another 2 hours to plant the tomato seedling. Alex also installed a new automatic watering and fertilizing system. Weeding is now done with special equipment that cuts operation time further. Three months after first tilling the land, the tomatoes are ready to be harvested. Again with the use of special equipment, Alex is able to harvest the whole plot in three hours. Total weight of tomatoes harvested: 500 kilograms. Not only was Alex able to cut production time with the use of new technology, he was able to increase production as well. Immediately after harvesting, Alex is already seen on his tractor readying the land for the next planting cycle. In this simplistic example, the supply curve of tomatoes shifts to the right of its original position to indicate an increase in supply.

Supply is also influenced by the prices of related goods, particularly goods that can be readily substituted for one another. Take the car company Proton for example. What will happen to the supply of Iswaras if the price of Wajas increases? Answer: The supply of Iswaras will be reduced (the supply curve of Iswaras will shift to the left). Lets look why this happens. To produce Iswaras and Wajas, Proton uses about the same limited factors of production. If the factors are used on Iswaras then they cannot be used on the Wajas, and vice-versa. This is the concept of opportunity cost. If the price of Wajas increases, Proton will be more inclined to produce more Wajas. This is consistent with the law of supply that state as prices increases, more quantity will be produced. And with the increase in the production of Wajas, more factors of production will be used on the Wajas and less will now be available for the Iswaras. With less factor of production available for Iswaras, fewer units can be produced resulting in the shifting of the supply curve for Iswaras to the left of its original position. What do you think will happen to the supply of Kenaris if the price of Kelisas increases?

Government policies also has an important influence on supply. Environmental and health consideration determine what technologies can be used, while taxes and minimum-wage laws can significantly raise input prices. Government regulations influences both the number of firms that can compete in a market and the types of services they provide.

Other special influences also affect supply. Weather, climatic conditions, spirit of innovation, etc.