Look around you and you will find many goods and services available
for sale: From books to pencils, cars to trucks, burgers to pizza,
bus services to medical services, and so on. These goods and services are produced by businesses and are bought by consumers
to fulfill their needs and wants. The relationship between businesses and consumers is a simple one: consumers demand goods
and services and businesses supply them. For the goods and services produced and sold, businesses earn profits. It is a healthy
relationship where both parties win consumers get what they want and need, and businesses or firms get profits.
Supply is defined as
the willingness and ability of producers to supply goods and services. Like demand, willingness and ability
must coexist before supply can be present.
is the readiness of firms to produce, and ability
is the capability or having the means to do so. Willingness to produce a particular good or service
is always tied to the potential of making profits
and this is further connected
to demand of that good or service. Firms see profits in goods or services demanded by consumers and are always guided by this
in determining their willingness or unwillingness to produce. The element of profits is always linked to price; therefore,
firms always keep a watchful eye on the prices of goods in their production decisions. When the prices of goods and services
are high they will produce more than when prices are low. The reason is simple: Higher prices bring higher profits. The ability
of firms to produce depends on many factors, but the most important are the availability of factors of production and the
capability of the firms to produce the goods or services efficiently. When they are able to produce at the least possible
cost, they can remain competitive and continue to get profits.
Willingness to produce without ability to do so cannot create supply;
and ability without willingness will not create supply either. You will notice there is no snow ski slopes on campus. Why?
First there is no demand for one, so firms are not willing to produce. Even if there is a demand, firms do not have the ability
to do so, at least not now with the available technology (There insufficient factors of production; plus its too difficult
or costly). Is there supply of floppy disks on campus? Yes, there is. Firms are willing to produce (because there is
demand and the price is right) and they have the ability to produce them.
Once the supply of a particular good or service is offered, the next
thing to ask is "what is the quantity firms are willing and able to supply?" The number (or amount or quantity) of
units firms will supply will depend on the price of the good or service. And
since firms are always keeping a watchful eye on profits, they will produce more when prices are high and less when prices
are low. At higher prices, firms see higher profit potential. The Law of Supply
states that as price increases, the quantity supplied will also increase, and conversely when price falls, quantity supplied
will also fall, ceteris paribus. This law is illustrated graphically as an upward sloping curve that shows a positive
relationship between price and quantity supplied. It is important to note that the price of a particular good or service will
affect its quantity supplied. The changes in quantity supplied are shown as movements along the supply curve. Later you will
learn about changes in supply that shift the supply curve either to the left or right of its original position. It is also
important to note that the supply curves only exist for goods or services supplied. There is no supply curve for goods or
services that producers are unwilling and/or unable to supply.